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  • FIRST POST
    • sarahgd
    • By sarahgd 3rd Dec 19, 6:53 PM
    • 16Posts
    • 4Thanks
    sarahgd
    Biz has really taken off but I'm in a bit of a muddle with how to pay myself
    • #1
    • 3rd Dec 19, 6:53 PM
    Biz has really taken off but I'm in a bit of a muddle with how to pay myself 3rd Dec 19 at 6:53 PM
    Hi All,

    Firstly, I'm thankful for any advice.

    I have an online business thats really taken off in the last year, we sell hair accessories.

    This has been my only job so I thought paying myself would be nice and easy... turn out it is, but doing it properly is another thing all together!

    So I'm paying myself 12,500 paye this year and making the rest up with dividends, so far I've taken 37,500 which takes me up to 50,000 for the year as things stand. This means I've stayed within my personal allowance, contributed my NI payments etc and also taken div at 7.5%. All seems relatively ok so far, although I'm sure I'll soon be corrected.

    If I were to look to take further money out this year how would be the most tax efficient way of doing this?

    If I take divs the tax band goes upto 32.5% and technically I'll be paying 19% corporation tax as well so its over 50% in effect?

    If I take more PAYE, I'll still be within my basic rate PAYE allowance of 20% up until i reach 50,000 allowance and then it rises to 40%? So this is where I'm getting confused... Do I need to add my divs and PAYE income together for Income tax or keep them separate?

    And If I increase my PAYE I guess I'll be technically paying more as I'll have to include NI (both employers and employees).

    I hope the drivel above makes sense? I really don't mind paying the tax, I just want to make sure I do it as efficient as possible.

    Hope someone can help

    Thanks.

    S
Page 1
    • Pennywise
    • By Pennywise 3rd Dec 19, 7:00 PM
    • 12,362 Posts
    • 24,661 Thanks
    Pennywise
    • #2
    • 3rd Dec 19, 7:00 PM
    • #2
    • 3rd Dec 19, 7:00 PM
    With divs, you don't pay over 50% because your dividends are after the 19% corporation tax. So, say 10,000 profit, corporation tax 1,900, balance 8,100 paid out as dividends and taxed at 32.5% (2632,50) so your net after tax is 5467.50, tax approximately 45%.

    If you pay PAYE, you pay employers NIC on top of employees NIC and then 20% income tax, BUT, it would push some of your dividends into the 32.5% dividend tax higher rate band, so will cost you more than 45% in combined tax and NIC, so the answer is dividends for the balance over 50k.
    • gdrforest
    • By gdrforest 3rd Dec 19, 7:36 PM
    • 25 Posts
    • 10 Thanks
    gdrforest
    • #3
    • 3rd Dec 19, 7:36 PM
    • #3
    • 3rd Dec 19, 7:36 PM
    Have you paid company contributions into a personal pension? That removes the contributions from all taxes.
    • sarahgd
    • By sarahgd 3rd Dec 19, 8:00 PM
    • 16 Posts
    • 4 Thanks
    sarahgd
    • #4
    • 3rd Dec 19, 8:00 PM
    • #4
    • 3rd Dec 19, 8:00 PM
    Pennywise, Thanks for your email. I understand what you mean with divs, CT and div tax, I was just giving rough numbers.

    I think the penny has no dropped (excuse the pun), I didn't realise that div rates we're effectively aligned with PAYE rates... basic, higher and additional! I thought it was just separate tax rates which didn'g hand in hand with PAYE.

    Is there ever an instance where it makes sense to pay yourself PAYE over divs?

    Thanks again.
    • sarahgd
    • By sarahgd 3rd Dec 19, 8:01 PM
    • 16 Posts
    • 4 Thanks
    sarahgd
    • #5
    • 3rd Dec 19, 8:01 PM
    • #5
    • 3rd Dec 19, 8:01 PM
    gdrforest - this is something we're doing but and I know I could put a lot more through but I wouldn't be able to touch it until we're 55 which puts me off at the moment.
    • 00ec25
    • By 00ec25 4th Dec 19, 7:54 AM
    • 8,758 Posts
    • 8,679 Thanks
    00ec25
    • #6
    • 4th Dec 19, 7:54 AM
    • #6
    • 4th Dec 19, 7:54 AM
    Is there ever an instance where it makes sense to pay yourself PAYE over divs?.
    Originally posted by sarahgd
    perhaps it may help if you understand that "income" is taxed in a rigid order. Think of a column, the bottom comprises employment income, pensions etc, the middle is (in simple terms) rental profits etc, whilst the top comprises dividends. This gives rise to the saying dividends are "top slice income"

    obviously as you go up the column you cross the various the tax thresholds, so if you were to pay yourself high earnings what you also have to remember is you cross NI thresholds, and NI applies to both you personally and your company from which you taking the money.

    So as owner/director of your own company, the answer to your questions in a word is: no

    high earnings result in employee NI (@ 2% in higher rate bracket) and employer NI (13.8%), neither of which are payable in dividends.
    Yes NI ER is a cost for the company against its profits, and obviously so is gross pay, but overall, whilst tax rules remain as is, dividends are always more tax efficient than pay, but obviously carry the risk that they can only be paid from profits, so can vary yr/yr
    Last edited by 00ec25; 04-12-2019 at 7:57 AM.
    • sarahgd
    • By sarahgd 4th Dec 19, 3:46 PM
    • 16 Posts
    • 4 Thanks
    sarahgd
    • #7
    • 4th Dec 19, 3:46 PM
    • #7
    • 4th Dec 19, 3:46 PM
    00ec25 - Thats great, Its really helped to get my head round things.

    I'm really reluctant to take out any further money this year as I'll be paying close to half of what I take in tax, If I can manage I think I'll opt for extra pension payments for the long term and keep some excess cash in the biz as like you say trading can and will vary yoy.

    In the longer term has anyone looked at alternative methods to invest monies such as the EIS scheme, buying assets through the biz, investment funds etc?

    The more i read its absolutely fascinating.
    • katy123
    • By katy123 4th Dec 19, 4:26 PM
    • 300 Posts
    • 8 Thanks
    katy123
    • #8
    • 4th Dec 19, 4:26 PM
    • #8
    • 4th Dec 19, 4:26 PM
    An alternative of paying yourself is to look at pension contributions directly via the ltd company, all CT deductable.
    • nmn
    • By nmn 4th Dec 19, 5:14 PM
    • 20 Posts
    • 12 Thanks
    nmn
    • #9
    • 4th Dec 19, 5:14 PM
    • #9
    • 4th Dec 19, 5:14 PM
    EIS, SEIS, VCT all have good tax relief but you need to have paid the tax first before you can get it back - and its not specific to being a company director. Certainly paying yourself, in order to pay the tax, in order to claim it back is good planning - although buyer beware its not risk-free


    As others say, pension the max. 40k/year is a good idea



    So long as the scheme still exists, ER is very efficient once you close down the co. https://www.gov.uk/entrepreneurs-relief
    Last edited by nmn; 04-12-2019 at 5:18 PM. Reason: risk
    • Savvy_Sue
    • By Savvy_Sue 4th Dec 19, 7:06 PM
    • 40,293 Posts
    • 37,740 Thanks
    Savvy_Sue
    This is something where you might really benefit from talking to your accountant, who knows YOUR business and YOUR situation. Getting it wrong may be costly.
    Still knitting!
    Completed: TWO adult cardigans, 3 baby jumpers, 3 shawls, 1 sweat band, 3 pairs baby bootees, 2 sets of handwarmers, 1 Wise Man Knitivity figure + 1 sheep, 2 pairs socks, 3 balaclavas, multiple hats and poppies, 3 peony flowers, 4 butterflies ...
    Current projects: pink balaclava (for myself), seaman's hat, about to start another cardigan!
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