Div V Salary

[Rydalcommunications]

Hi Guys,

What is the best way to pay yourself as a director. With 20% corp tax and 10% dividend if your paying yourself under 34k its prob better to be salaried?

Regards
Steff

 

[Scalloway]

If you are salaried you will pay national insurance and employers national insurance on the salary. If you pay a small salary you get credit for NI but do not pay any. Dividends come out of taxed profit so there is no further tax on them if you are below the 40% band.

Dividends are always recommended for directors if there are available profits.

 

[Paul_Rosser]

Hi Guys,

What is the best way to pay yourself as a director. With 20% corp tax and 10% dividend if your paying yourself under 34k its prob better to be salaried?

Regards
Steff

Paying yourself to your tax free allowance and then dividends on the rest is better as you don't pay the 10% on the dividend as you have already paid Corporation tax on it.

Provided the dividends are paid out of profit.

 

[nelioneil]

For 2013/14:

Personal allowance for people born after 5 April 1948: £9440
Basic 20% tax band: £0 to £32010 of taxable income
Higher 40% tax bands: £32,011 to £150,000 of taxable income.


To avoid paying any PAYE Income Tax and National Insurance (employee and employer), your salary must be at most £148 a week. You can pay lower but would be getting less "State handout credits". I assume you would be paying monthly so the most is £641.33 a month to be precise (148X52 weeks/12).

But lets just say £641 a month, that makes your annual salary of £7692. This is easily within the personal allowance.


Dividends are taxed at 10% at the basic rate band (£0-32010), and higher rates at the next bands. However, a notional 10% is deducted at source when paying dividends so its essentially a tax credit of 10% (at all bandss). So there is no tax to pay.


Therefore you would pay the following to avoid any tax liability as an employee:

Salary: £7692
Dividends: £32010

Total: £39702

Could someone please double check my figures above. It would be good to have this sort of information on a sticky thread.

Obviously the above assumes no other substantial income. If you have more complicated tax affairs, speak to an accountant


http://www.hmrc.gov.uk/rates/it.htm
http://www.hmrc.gov.uk/payerti/forms-updates/rates-thresholds.htm

 

[megotbigears]

If the company is currently not in profit (1st year) can you still pay yourself £641 and put it in the directors loan account to take out when start trading at a profit?

I am assuming, although one has not physically taken any salary out (but put in director loan account), then one would still put it as earnings on working tax credit disclosure?

Thanks in advance

 

[Scalloway]

You can put unpaid salary into your director's loan account for later withdrawl.

 

[David Griffiths]

Could someone please double check my figures above.

If you pay the salary of £7,692 and dividends of £32,010, there will be higher rate tax liability on £424

 

[nelioneil]

If you pay the salary of £7,692 and dividends of £32,010, there will be higher rate tax liability on £424

Ah yes, I put in the gross divdend figure, I meant net.

So it should be the below?

Salary: £7692
Net Dividends: £30382 (gross is £32,010)
Total: £38074

 

[nelioneil]

Whoops meant net dividend £28,809 (I believe...)

 

[Rydalcommunications]

Hi Guys thanks for the reply.

Can someone please elaborate more on why I don't pay the 10% tax personally when it states this on the HMRC website.

This is why I am under the impression it would cost me 30% all in when accounting for corporation tax paid through your business.

Can someone do a comparison versus each other on 30k?

This will be really good for anyone searching for the same information and will also to get my head around it.

Regards
Steffan

 

[Scalloway]

Article on 10% dividend tax credit here

http://www.capricaonline.co.uk/guides/dividend-tax-credits-explained/

Profit..........£30,000
Salary..........£7,696

Taxable.......£22,304

Tax @ 20% £4,460.80

Salary ..................£30,000
Personal allowance...£9,440

Taxable pay...........£20,560

Tax @20%..............£4,112

NI deducted...........£2,669.40

Employers NI.........£3,077.95

 

[NickMoore]

So it should be the below?

Salary: £7692
Net Dividends: £30382 (gross is £32,010)
Total: £38074

I concur exactly with these figures.


The thing that throws it all off is savings interest, which will usually push you over anyway.

 

[nelioneil]

I concur exactly with these figures.


The thing that throws it all off is savings interest, which will usually push you over anyway.

I think the net dividend figure is £28,809 but I cannot go back and edit my post.

 

[NickMoore]

I think the net dividend figure is £28,809 but I cannot go back and edit my post.

I make it £30383 precisely.

My working:
Salary 7692.00
Net dividend 30383.00 + Tax credit 3375.88 = Gross dividend (rounded down to nearest pound - HMRC does this) 33,758.00
Total taxable income: 41450.00

The magic number 41450 (9440+32010) is what tells us there's no tax to pay.

 

[nelioneil]

I make it £30383 precisely.

My working:
Salary 7692.00
Net dividend 30383.00 + Tax credit 3375.88 = Gross dividend (rounded down to nearest pound - HMRC does this) 33,758.00
Total taxable income: 41450.00

The magic number 41450 (9440+32010) is what tells us there's no tax to pay.

But £33758 is above the basic rate band of £32010, so surely the difference (£1748) will be taxed at the higher rate?

With £32010 gross dividend, the salary is consumed by the personal allowance, so it leaves just £32,010 taxable income. 10% dividend tax (minus tax credit) so in effect no tax to pay.

 

[David Griffiths]

But £33758 is above the basic rate band of £32010, so surely the difference (£1748) will be taxed at the higher rate?

Whether one element of the income is below or above the basic rate band is irrelevant. It's the total income that matters.

In this case, the salary is lower than the personal allowance, so there can be more dividends before the higher rate band is reached.

 

[Paul_Rosser]

David - Is it ok to PM you about this thread ?

Thanks

 

[Rydalcommunications]

Hi guys,

isn't the taxable allowance £9,440?

some are working to the 2011-12 rates?

regards
steffan

 

[Scalloway]

The idea is to save you NI. £7,696 is the maximum salary to avoid NI payments.

 

[kevin.doran]

I make it £30383 precisely.

My working:
Salary 7692.00
Net dividend 30383.00 + Tax credit 3375.88 = Gross dividend (rounded down to nearest pound - HMRC does this) 33,758.00
Total taxable income: 41450.00

The magic number 41450 (9440+32010) is what tells us there's no tax to pay.

Spot on.

I think it's always handy to know monthly figures of:

£641 salary
£2531 max average monthly net divi before moving into HRT.