Sole owner LTD income question

Dmill · Jun 12, 2013

Hi guys. I'm sorry if this has been asked a thousand times but I couldn't seem to find an answer that clarified some points for me.

I just created a limited company in the UK. I currently already run a company abroad so I'm finding it hard to wrap my head around a new system.
I'm the only shareholder and director and Am now considering my options as far as paying myself goes.

I've had a read around and this is how I was thinking of proceeding, but I still have some questions regarding it.

I would like to pay myself as an employee bellow or equal to the personal Allowance limit (through PAYE). Which in my case I believe to be £9,440/year for salary payed in 2013
My first question is, is this amount net or gross salary? Or are they equivalent as I should not pay tax on this?
Any clarification in this department would help me a lot. Does national Inssurance come into play on this level, what should I expect to pay for it?

Then I would like to pay myself dividends on the rest. The company will make under 300k profit yearly so if I understand correctly I should expect to pay 20% tax on this profit after which I can pay myself dividends.

And provided the income tax link if my dividends amount to under £32,010 then I should pay 10% income tax on that. Can someone clarify that my salary payed through PAYE should not be added to this? It was my understanding that the 0-32,010 range was after deduction of my personal Allowance so in this case only dividends.

Does this sound correct? Does it sound like an efficient way of going about things given the maximum total income of 32k+9.4k I wish to pay myself.

Thanks a lot for your help and clarifying things.

Also, should dividends be distributed once yearly or can they be distributed monthly prior to the end of year (provided I make sure profits are high enough to cover dividends and tax at the end of year)

PS: I've used the HM Revenu website for these figures, I would post links but I'm not allowed to do so.

Highgate · Jun 17, 2013

As you say you have interests in other countries but have not mentioned them in detail, nor your resident/domicile status then it is hard to give categorical advice. However, for UK residents with no other concerns:

PAYE: income up to your personal allowance level (assuming UK-res/dom and no other personal income streams) is gross, and tax free. However, watch out that the NIC thresholds are lower than the PA level, so you would be levied Class1 NIC on income in excess of the NIC threshold. This does maintain your annual contributions basis, so may not be a bad thing.

Topping up with divs up to the 40% threshold - not quite: there is a deemed 10% tax credit, so if you drew say £20k div in cash from the company on top of your PAYE earnings, it would be reporting on your tax return as £22,222 gross div, but you then receive a tax credit of £2,222 against that, leaving you with a net £20k. So in effect that is tax-free (or tax-paid) but in a roundabout sort of way.
If you can't get your head around it, do some more reading or chat to an accountant.

Timing of divs: there are simplistic ways to do it, but if you can demonstrate from (say) a set of annual accounts that there are reserves of profit then you can issue a dividend. If you can run these accounts quarterly or monthly then you can issue dividends more frequently. At this level other timing concerns are not as important - which is not to say you shouldn't consider them and know your ground - but the point is that you must be able to demonstrate that you had sufficient reserves. Don't push it too fine.

Again, something like this is going to be pretty straightforward for your accountant and the cost of lack of compliance on your part should be weighed.

Scalloway · Jun 17, 2013

If you pay yourself a salary of £9,440 you will be liable for NI payments.

I take it your are a UK resident for tax purposes. I would reccomend getting advice from an accountant if you have any non UK income.

Dmill · Jun 18, 2013

Thanks guys. I've got this more or less sorted.

I don't have any foreign income yet. My limited company essentially bills a company I own abroad for work I do from the UK. I don't get any dividends or any other source of income from this foreign company.

One question that I have been wondering about is in relation to National insurrance. I've been looking into paying above the Lower earnings limit, primary Class 1 of £109/week but bellow the Primary threshold of £149/week. Is there any major drawback to doing this?

Thanks for the help guys.

Newchodge · Jun 18, 2013

Dmill said:
Thanks guys. I've got this more or less sorted.

I don't have any foreign income yet. My limited company essentially bills a company I own abroad for work I do from the UK. I don't get any dividends or any other source of income from this foreign company.

One question that I have been wondering about is in relation to National insurrance. I've been looking into paying above the Lower earnings limit, primary Class 1 of £109/week but bellow the Primary threshold of £149/week. Is there any major drawback to doing this?

Thanks for the help guys.

It is the most tax efficient way of doing it as you receive NI credits towards your pension, but make no NI or tax payments. You would have to register the company with HMRC as an employer and submit monthly declarations through RTI.

Dmill · Jun 18, 2013

Newchodge said:
It is the most tax efficient way of doing it as you receive NI credits towards your pension, but make no NI or tax payments. You would have to register the company with HMRC as an employer and submit monthly declarations through RTI.

Perfect thanks. That's exactly how I planned to go about it. you just confirmed what I was thinking.

Thanks a lot!

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