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

Duckdoodles

oldbikebloke said:

Nat West owns both Mettle and FreeAgent and is keen to build business volume for both and both labels work well together and are keen to support each other's software developments going forward (their cross promoting is rather in your face at times).
Just be aware of the status of Mettel, it is just a software app, it is not a regulated bank, and you have no FSCS protection as it is not Nat West (Or technically the parent company RBS)

FreeAgent does include Payroll so that is sorted 
looks like you are going to be well set up - if you have any problems with FreeAgent drop me a PM and I'll happily help for free (used to work at a practice with 700 clients on it)

the remaining issue therefore is your personal tax return which you may want to get someone to do first time then DIY it once you see what they do and you are confident nothing significant will change next time

register your e mail with co hse then follow this , is easy.
https://www.gov.uk/file-your-confirmation-statement-with-companies-house

Dear Oldbikebloke, 
You questions made me realise I hadn't considered the personal tax return at all.  Since then I have managed to get him to include both it and payroll in the £100 per month package, so I have just signed up to go comprehensive. Once I learn what's required, I may downgrade but for now, this approach hurts my brain less and also lets me spend more time doing my actual work. I also wasn't aware Mettel  isn't regulated, so thank you for that. I have persuaded him to let me keep using my existing business account, which has similar features. He seems to think it's more hassle but we'll see. 

I have one more question. I have been advised to take a salary of £732 a  month to ensure I stay below the NICs threshold. That's £8788 I think I read. 

What period does this cover, though? Is it from date of incorporation (8 months left of that year), from date of trading (11 months left of that year) or per financial year (5 months left) or just 12 months from my first pay day (haven't been paid yet)? Depending on which it is, does that mean I would get a salary of 8788/ number of months left whichever period?
Or, is £732 just the max. you can take per month regardless of the period? 

Is the personal tax return calculated over a different period to the corporation tax? 

Thank you for all your help and for going over and above.
Duckdoodles. 

oldbikebloke

I have one more question. I have been advised to take a salary of £732 a  month to ensure I stay below the NICs threshold. That's £8788 I think I read. 

What period does this cover, though? Is it from date of incorporation (8 months left of that year), from date of trading (11 months left of that year) or per financial year (5 months left) or just 12 months from my first pay day (haven't been paid yet)? Depending on which it is, does that mean I would get a salary of 8788/ number of months left whichever period?
Or, is £732 just the max. you can take per month regardless of the period? 

Is the personal tax return calculated over a different period to the corporation tax? 

Thank you for all your help and for going over and above.
Duckdoodles. 

for personal tax, the tax year (TY) is what matters: 6th April to the following 5th April 

for corp tax, it is your company's "accounting period", but as this is the first period of trading, read this as there is no point me simply repeating what is written there:
https://www.gov.uk/first-company-accounts-and-return

£732 is the "secondary threshold" for NI for the 20/21 TY 
https://www.gov.uk/government/publications/rates-and-allowances-national-insurance-contributions/rates-and-allowances-national-insurance-contributions
that means the point above which an employer must pay employers NI ("ER NI") @ 13.8%. As you are a "one man band" HMRC do not allow your company to claim employers NI allowance against the ER NI liability of its sole director. Therefore the recommendation from the accountant is done to make sure your company does not have to pay ER NI 

"you" are the totality of a) the company as employer and b) you as the (sole) employee. Consequently, avoiding ER NI when a Personal Service Company ("one man band") does mean "you" are restricted to the secondary threshold rather than the employee's primary threshold of £792/mth. 

Sorry but I do not know your full personal circumstances for the year to date and and am too drunk to think it through for now, perhaps someone else can answer (Jeremy ???? Pennywise ?????) 

However, if we consider the position for a full tax year, not the pro rata year you are actually in, lets suppose you drew £792/mth salary and your P/T job  "uses up" your personal allowance in full, so means the company salary is subject to personal income tax but not NI as NI is per job/payment, not cumulative across all sources per year 

Personal position: £792 company salary
Company position: 792 - 732 = £60 @13.8% = £8.28 ER NI payable by company as employer (no allowance to offset it as explained above)

Option a) Pay ER NI
turnover 33,600
salary cost (792 x 12) 9,504
ER NI (8.28 x 12) 99.36
profit b4 tax 23,997
CT 19% 4,559
distributable profit 19,438

personal income:
salary 9,504 less 20% tax (1,900) = 7,604
dividend taken 19,437 less (2k) and tax 7.5% (1,307) = 18,130
post tax personal income : 7,604+18,130 = 25,734

Option b) avoid ER NI
turnover 33,600
salary cost (732 x 12) 8,784
ER NI 0
profit b4 tax 24,816
CT 19% 4,715
distributable profit 20,101

personal income:
salary 8,784 less 20% (1,756) = 7,028
dividend taken 20,100 less (2k) and tax 7.5% (1,357) = 18,743
post tax personal income : 7,028+18,743 = 25,771

you are marginally better off with the lower salary because it gives more money to take as dividends which have the lower tax rate.

FOOTNOTE
you are director of LTD Co, so a special rule applies
For NI purposes (only) that means your pay is not assessed on a per pay period basis, it is in fact assessed on an annualised basis.  So you (and the company) would only incur NI if your total company pay in the tax yr (apr-apr) exceeds the primary and/or secondary ANNUAL threshold.

Jeremy535897

I think you need to take into account that the remaining personal allowance will be available against the dividend?
You would then compare dividend 19437 (tax is 19437-2000- (12500-9504) at 7.5% = £1083
Take home is £9504 + £19437 - £1083 =£27858
To dividend 20100 (tax is 20100-2000-(12500-8784) at 7.5% = £1079
Take home is £8784 + £20100 - £1079 = £27805 (£53 more)

Being increase in CT less ERNIC 4715-4559 = 156- ERNIC 99 = 57 - 4 additional tax on dividend = £53

oldbikebloke

Jeremy535897 said:

I think you need to take into account that the remaining personal allowance will be available against the dividend?
You would then compare dividend 19437 (tax is 19437-2000- (12500-9504) at 7.5% = £1083
Take home is £9504 + £19437 - £1083 =£27858
To dividend 20100 (tax is 20100-2000-(12500-8784) at 7.5% = £1079
Take home is £8784 + £20100 - £1079 = £27805 (£53 more)

Being increase in CT less ERNIC 4715-4559 = 156- ERNIC 99 = 57 - 4 additional tax on dividend = £53

he has a simultaneous p/t employee job paying 1174 gross/mth so won't have unused personal allowance of the amount you have used from Oct 20 onwards. He may have some b/fwd before the job started but I would expect that to be applied under PAYE so that is why I said we don't know his yr to date position so can't say in totality. 
for year 2 onwards he will not have any unused allowance at all hence I said i excluded it from the illustration as it has no effect on either option

Jeremy535897

There will be some impact though, as in your example I think you assume £9,504 available personal allowance in the first scenario, and £8,784 personal allowance available in the second?

oldbikebloke

Jeremy535897 said:

There will be some impact though, as in your example I think you assume £9,504 available personal allowance in the first scenario, and £8,784 personal allowance available in the second?

ooops, now corrected

Duckdoodles

This is so helpful! Thank you very much. I read the links too and now understand the account periods, finally. 
And, yes, I was employed FT until July and earned just over 12,500, so my personal allowance has been used up already.

I feel like someone could make an awesome spreadsheet/calculator that can calculate it all for you, including for people with multiple sources of income, if you punch the numbers in, but the ones I've seen online either have other income missing, or don't allow for pro rata. Hoping MSE will make one, like they did the mortgage overpayment calculator. 

Duckdoodles. 

oldbikebloke

PS never answered your Q re 732 period.
- as that is salary it must be reported through PAYE payroll software to HMRC under the "RTI" (real time info) rules.
- No payroll been run yet so no RTI submitted.
- You are a director so annualised figure applies, 

your accountant may therefore choose to process a lump sum payment thru RTI before year end covering as many 732/mth he can be bothered with