Ltd Company. Basic Salary + Dividends

Ayrton_Instrumentation · Aug 16, 2011

Hi all,

I'm looking for some advice on making payments from my Ltd company. I have up until recently been using a payroll company but they have not been performing and I've ended up having salary paid late, etc. plus they had me on PAYE for some unknown reason :|

So I've decided to do the job myself. From trudging the web, I gather the best way to stay under the radar with IR is to pay myself a basic salary and then take dividends? If I was to pay myself a salary equal to or less than my personal allowance and the rest in dividends, am I right in thinking that I will be paying 20% CT and Class 4 NIC?

Is the 20% CT deducted from the gross income or from net once my basic salary has been paid? I am assuming it is the former.

Are the dividends subject to any further taxation if my salary doesn't exceed my personal allowance?

What is the best way to keep records of all of this? Any recommendations for software?

Thanks in advance

Robert Pearce · Aug 16, 2011

Any salary that you take is a tax deductible expense. The company will pay corporation tax on its net profits, i.e. after taking expenses, such as salary, into account.

You won't pay Class 4 National Insurance as this is payable by sole traders and partners.

If you keep your salary below £136/week, there will be no PAYE or Class 1 national insurance payable. It's usual to take a salary that is above the lower earnings limit (£102/week for 2011/12), as it means that you'll qualify for certain state benefits. However, this does lead to year end filing requirements.

Dividends declared by the company forms part of your taxation income. If you are a basic rate taxpayer, dividends are effectively tax free. Once you become a higher rate taxpayer (which requires income of £42,475 in 2011/12), the effective tax rate on dividends is 25%.

HM Revenue & Customs has a Basic PAYE Tools package on its website that can be downloaded and used to process the payroll:

http://www.businesslink.gov.uk/bdotg/action/layer?topicId=1086857322

It's probably worth sitting down with an accountant to talk through things in more detail.

Ayrton_Instrumentation · Aug 16, 2011

Robert Pearce said:
Any salary that you take is a tax deductible expense. The company will pay corporation tax on its net profits, i.e. after taking expenses, such as salary, into account.

You won't pay Class 4 National Insurance as this is payable by sole traders and partners.

If you keep your salary below £136/week, there will be no PAYE or Class 1 national insurance payable. It's usual to take a salary that is above the lower earnings limit (£102/week for 2011/12), as it means that you'll qualify for certain state benefits. However, this does lead to year end filing requirements.

Dividends declared by the company forms part of your taxation income. If you are a basic rate taxpayer, dividends are effectively tax free. Once you become a higher rate taxpayer (which requires income of £42,475 in 2011/12), the effective tax rate on dividends is 25%.

Thanks

So, If my company generates a weekly income of, for example, £1000 gross I would be looking at the following?

Income £1000
Salary £135
Misc Expenses £15

That leaves a net profit of £850. I presume I would pay 20% of this in CT?

So that leaves an actual profit of £680?

I could then pay a dividend of £500, leaving £180 in company funds?

Does that sound about right?

Also, on this basis, drawing a weekly salary of £125, do I need to register for PAYE and employ myself?

Does the higher rate tax band on dividends apply when the total dividend amount paid exceeds £42,475 or does that threshold amount include the basic salary amount as well? ie; my total net wage.

NEF · Aug 16, 2011

In my normal job I earn over the threshhold and pay the higher rate tax. If I have a LTD Business also separate, how much corporation tax would I pay on profit and also how much wouldpay on any dividends I pay myself?

Thanks

MyAccountantOnline · Aug 16, 2011

NEF said:
In my normal job I earn over the threshhold and pay the higher rate tax. If I have a LTD Business also separate, how much corporation tax would I pay on profit and also how much wouldpay on any dividends I pay myself?

Thanks

A limited company is a separate person to you - it will pay tax at 20% (assuming it's a small company) on the profit it makes.

As a shareholder if you are paid dividends they are deemed to have 10% tax deducted and you'll only pay tax on them if you are a higher rate tax payer. If you pay 40% tax your dividends will be subject to 32.5% it's 42.5% if you pay 50% higher rate tax.

NEF · Aug 16, 2011

So because I pay 40% tax in my normal day job, I'll also pay 20% tax on any profit I make in my ltd business and 32.5% on any dividends I pay myself...

The reason I was told by an accountant to go ltd rather than sole trader was so I could actually pay dividends and be better off than if I started as a sole trader in my circumstances...If this is correct what your saying I'm onto a loser, seems no point..

MyAccountantOnline · Aug 16, 2011

NEF said:
So because I pay 40% tax in my normal day job, I'll also pay 20% tax on any profit I make in my ltd business and 32.5% on any dividends I pay myself...

The reason I was told by an accountant to go ltd rather than sole trader was so I could actually pay dividends and be better off than if I started as a sole trader in my circumstances...If this is correct what your saying I'm onto a loser, seems no point..

I dont disagree with the advice you've been given based on what you've said.

If you were a sole trader you'd pay 40 maybe 50% Income tax on your profits and depending on your profits up to 9% class 4 NIC.

Truemanbrown · Aug 16, 2011

NEF said:
So because I pay 40% tax in my normal day job, I'll also pay 20% tax on any profit I make in my ltd business and 32.5% on any dividends I pay myself...

The reason I was told by an accountant to go ltd rather than sole trader was so I could actually pay dividends and be better off than if I started as a sole trader in my circumstances...If this is correct what your saying I'm onto a loser, seems no point..

If you are a higher rate taxpayer just from your employment income then any profits as a self employed person would be taxed at 40%. Plus you will also pay:-

Class 2 National Insurance (£2.50 per week for 2011/12)
Class 4 National Insurance (9% on profits between £7,225 and £42,475 and then 2% on profits over £42,475).

Also, although you pay tax on dividends at 32.5% if you are a higher rate taxpayer and 42.5% if you pay tax at 50%, the 10% tax credit is deducted from the liability.

I suggest that you would be better off using a limited company.

NEF · Aug 16, 2011

So if I earn £1000 profit for example... I pay 20% corporation tax on in as a ltd company leaving me with £800 then any dividends from this I pay 32.5 % on leaving me with £540, seems ridiculous.. What would the outcome be from £1000 profit if I was a sole trader, even less..

I was told I'd pay 12% on dividends.. :|

Ayrton_Instrumentation · Aug 16, 2011

So can anyone tell me if these are correct?

Ayrton_Instrumentation said:
Thanks

So, If my company generates a weekly income of, for example, £1000 gross I would be looking at the following?

Income £1000
Salary £135
Misc Expenses £15

That leaves a net profit of £850. I presume I would pay 20% of this in CT?

So that leaves an actual profit of £680?

I could then pay a dividend of £500, leaving £180 in company funds?

Does that sound about right?

Also, on this basis, drawing a weekly salary of £125, do I need to register for PAYE and employ myself?

Does the higher rate tax band on dividends apply when the total dividend amount paid exceeds £42,475 or does that threshold amount include the basic salary amount as well? ie; my total net wage.

Oh, and thanks for hijacking my thread NEF

Rather rude, don't you think? Why not create your own thread?

NEF · Aug 16, 2011

Sorry Ayrton..

Arch Stanton · Aug 16, 2011

Ayrton_Instrumentation said:
Thanks

So, If my company generates a weekly income of, for example, £1000 gross I would be looking at the following?

Income £1000
Salary £135
Misc Expenses £15

That leaves a net profit of £850. I presume I would pay 20% of this in CT?

So that leaves an actual profit of £680?

I could then pay a dividend of £500, leaving £180 in company funds?

Does that sound about right?

Also, on this basis, drawing a weekly salary of £125, do I need to register for PAYE and employ myself?

Does the higher rate tax band on dividends apply when the total dividend amount paid exceeds £42,475 or does that threshold amount include the basic salary amount as well? ie; my total net wage.

Your figures look right to me.

My understanding is that a salary of £125pw will require your company to register as an employer.

The higher rate tax band applies when your gross dividends plus salary exceed £42,475.

Ayrton_Instrumentation · Aug 16, 2011

My last tax code was 647L which works out at £124 and a few pennies based on 52 weeks. So if I kept my 'wage' under that, would I need to register as an employer?

Arch Stanton · Aug 16, 2011

I think the threshold is £102pw. See here for HMRC guidance on when you will need to register: http://www.hmrc.gov.uk/paye/intro/register.htm#1

Search

Search

Ltd Company. Basic Salary + Dividends

Ayrton_Instrumentation

Robert Pearce

Ayrton_Instrumentation

NEF

MyAccountantOnline

NEF

MyAccountantOnline

Truemanbrown

NEF

Ayrton_Instrumentation

NEF

Arch Stanton

Ayrton_Instrumentation

Arch Stanton

Similar threads

Latest Articles