LTD Director & Salaried P/T- Salary or dividends?

Duckdoodles

Hello,
I am (self employed- NO) and set-up a limited company which starting trading in September 2020. I am the director and sole shareholder. No employees. 
Between start of trading and March 2021, I have a contract which will pay the company £2,800 a month. 
I am also starting a part time job at the end of the month (October 2020), which will pay £1,174.50 per month for about 2 years (annual salary of £16,130 per year gross). 
I don't have any other income. 
My question what is the most tax efficient way to take money out of the limited company? Via dividends or salary or both? And how much? 
Hope someone has more clue than I do!
Thanks in advance. 

[Deleted User]

Firstly - you are not self-employed. You are an employee of a limited company. Do you have an accountant? Limited company taxation, filing requirements are not for the amateur.

Dazed_and_C0nfused

I am self employed and set-up a limited company

Is that actually true or are you confused?

Duckdoodles

Confused! I am working for myself is what I should have said. 

Duckdoodles

[Deleted User] said:

Firstly - you are not self-employed. You are an employee of a limited company. Do you have an accountant? Limited company taxation, filing requirements are not for the amateur.

No not as yet. I still want to try to understand it myself. 

Duckdoodles

The other thing I'm confused about is, if dividends get paid out but aren't expenses like salaries are, and therefore, are still subject to Corporation tax of 19%, and if I pay the basic rate of 7.5% on any dividends I receive, does that mean in total I'm paying (19% plus 7.5%=) 26.5% on my company's profits in total? I get how taking the tax free £2k in dividends is tax efficient but not anything above that. 

Jeremy535897

There are websites dedicated to salary v dividends, and many company directors are regretting taking dividends in the past as it severely reduced their furlough payments, but you have to factor in that you would have to pay 20% (at least) income tax and 12% NIC if you took the money out as salary, and the company would have to pay 13.8% employer's NIC. You already pay sufficient NIC on your other job, so there is no benefit in paying more. Although the company gets corporation tax relief at 19% on these costs, unlike dividends, it is still more expensive than taking dividends and paying corporation tax.

oldbikebloke

Duckdoodles said:

The other thing I'm confused about is, if dividends get paid out but aren't expenses like salaries are, and therefore, are still subject to Corporation tax of 19%, and if I pay the basic rate of 7.5% on any dividends I receive, does that mean in total I'm paying (19% plus 7.5%=) 26.5% on my company's profits in total? I get how taking the tax free £2k in dividends is tax efficient but not anything above that. 

ok, I will indulge an example, although as above, plenty of websites explain in more detail
Let us start with your overall max position: p/t annual income 16,130 and own company turnover 33,600 so total cash in 49,730. The higher rate tax bracket is >£50,000 so we will consider basic rate tax comparison only as you can't be higher rate with that income 

Salary from company
the company will have costs so the entire turnover cannot be taken out in full, something needs to be left for the company to pay its bills from. Lets say you take 2,500 as monthly salary, leaving the company with £3,600 to pay its costs from (rounded amounts!).
Turnover 33,600
salary cost 30,000
employer NI 2,927 (first £8,784 tax free then rest @ 13.8%)
non pay costs 100 (even if you do not use an accountant, the company still has costs of its own)
profit 573
corp tax 108
retained profit 465

personal position 20% basic rate 
(i will ignore p/t job as the tax on that is a constant and uses up your personal allowance in full)
co salary 30,000
income tax thereon 6,000 (no personal allowance left, all @20%)
NI thereon 2,460  (£9,504 of 30,000 tax free, then rest @ 12%)
net pay 21,540

total tax paid 
2927+108+6000+2460 = 11,495

Dividends, no salary from company
Turnover 33,600
non pay costs 100 (even if you do not use an accountant, the company still has costs of its own)
profit 33,500
corp tax 6,365
profit after tax available for dividends 27,135
dividend taken 27,130
retained profits £5 (as a start up company it will need to have at least £1 left  - ask an accountant why)

personal position 20% basic rate (assumes no other dividend income)
dividends 27,135 less nil rate band 2,000 = 25,135 @ 7.5% = 1,885 income tax
no NI to pay on dividends
net dividend ("pay") = 25,250

total tax paid 
6,365 + 1,885 = 8,250

note carefully, the above is significantly skewed because the p/t job means from a personal perspective your national insurance is "covered" from that employment, so you will get the all important state pension credit from there without having to pay NI from your money via your own company, hence a no salary at all option is viable for your own company.
Taking as dividends avoids employer NI and, in your case, employee NI, and is the most significant reason why you are better off dividends rather than salary as a basic rate taxpayer. 

and also please take on board the single most important fact, a company can only pay dividends from the (post tax) profits it has. If your turnover drops you can't carry on taking such large dividends. In contrast, but only for a limited time, a salary can be paid and a company therefore make a loss but under no circumstances attempt to DIY company accounts for that, you'd need an accountant.
Technically HMRC can throw the book at you if you take a monthly dividend when the company does not have enough profits that month to pay it from. They also take a dim view of monthly amounts anyway as that is just too obviously PAYE avoidance by not paying a salary. However, people do take monthly whilst ignoring that risk, but if caught you'd be wise to get an accountant (which will cost you a lot in extra fees) to negotiate with HMRC on your behalf.

Duckdoodles

Dear @oldbikebloke and  @Jeremy535897, 

Thank you for indulging me, that was incredibly helpful!

I did read tens of websites beforehand, but the examples always had people who were working full-time on the side, or not at all and I assumed that mattered. Then I felt overwhelmed and came here.

Now that you've educated me, I realise it doesn't much matter what the mode of the salaried job is, it just matters whether or not you use up your personal allowance on it, and pay sufficient NIC.  I'll also make sure that dividends are paid maybe quarterly instead of monthly, which will be fine, because I have my regular salary to survive on in between. 

Rest assured, I will definitely be getting an accountant, at least in the first year, which may well be the last year, because this contract I have is only until March and I'm not much of a business person, so am unlikely to search out other opportunities after it ends (hence the salaried job plan . However, I now feel better prepared to ask the accountant the necessary questions (I insist on understanding it), so thanks a million! I have a meeting tomorrow for a quote. 

Thank you again- I asked a lot of roll-eyes questions, I know, and no one else was patient haha! 

Duck

Jeremy535897

Oldbikebloke has given you a lot of assistance. The only question in my mind is whether it is still marginally better to take £8,784 as salary, compared with £8,784 dividend (as Oldbikebloke said, most people take some salary because they need to hit the right amount to have a year's NIC credit, but you don't). The tax on £8,784 salary at 20% =£1,756.80. There is no NIC. The CT saved is £8,784 at 19% = £1,668.96, so net cost is £87.84, plus the cost of running payroll, but the same sum taken as dividend results in tax of £658.80. I think this is right, but it's a long time since I did this sort of thing (I remember apportionment). No doubt someone will correct me if I've got it wrong.

Duckdoodles

Jeremy535897 said:

Oldbikebloke has given you a lot of assistance. The only question in my mind is whether it is still marginally better to take £8,784 as salary, compared with £8,784 dividend (as Oldbikebloke said, most people take some salary because they need to hit the right amount to have a year's NIC credit, but you don't). The tax on £8,784 salary at 20% =£1,756.80. There is no NIC. The CT saved is £8,784 at 19% = £1,668.96, so net cost is £87.84, plus the cost of running payroll, but the same sum taken as dividend results in tax of £658.80. I think this is right, but it's a long time since I did this sort of thing (I remember apportionment). No doubt someone will correct me if I've got it wrong.

I'll be sure to ask the accountant your question and come back to confirm!