Optimum Salary / Dividend question

[GGGSurrey]

A friend (honest, not me!) has their own company - sole shareholder, plenty of retained cash, No IR35 considerations - has been considering the optimum salary/dividend mix for 2015/2016 and came up with the following:

Their company is eligible for Employers Allowance (so no Employers' NI) so they raised their salary from £8600 to £10 600 and reduced the dividends accordingly thus meaning their company gets a CT saving on the extra £2k of salary it pays.

I'm interested in how many people agree that this is the optimum approach.

Projected Calculation for 2015-16

Income received (before tax taken off)
Pay from all employments 10,600.00
Profit from UK land and property 5,000.00
Interest received from UK banks and building societies 375
Dividends from UK companies (plus 10% tax credits) 26,500.00
Total income received 42,475.00

minus Personal Allowance -10,600.00

Total income on which tax is due 31,875.00

Pay, pensions, profit etc. 5,000.00 @ 20% = 1,000.00

Interest received from a bank or building society etc. 0 @ 0% = 0
375 @ 20% = 75

Dividends from companies etc. 26,410.00 @ 10% = 2,641.00
90 @ 32.5% = 29.25

Total income on which tax has been charged 31,875.00

Income Tax charged 3,745.25
minus 10% tax credits on dividends from UK companies (not repayable) 2,650.00
Income Tax due after dividend tax credits 1,095.25

minus Tax deducted
Interest received from UK banks and building societies 75
Total tax deducted 75

Total Income Tax due 1,020.25

 

[john1989]

No.

Plus planning for 15/16 now isn't the best of ideas.

 

[GGGSurrey]

No.

Plus planning for 15/16 now isn't the best of ideas.

Thanks for the vote, John.

Why not? The later you leave it the more info (eg interest earned) one has in order to make the calculation.

 

[@aiteoconsulting]

Does your friend mind you sticking their private tax calculations on the internet?

 

[GGGSurrey]

Does your friend mind you sticking their private tax calculations on the internet?

No, they don't: they are interested in other's views about whether they got it right or not...

 

[UK Contractor Accountant]

The answer is...... wait for it...... .IT DEPENDS. SHOCKER!

The optimum dividend may be to take income up to £100K with the new dividend tax coming in next year.

 

[@aiteoconsulting]

Fair enough!

 

[GGGSurrey]

The answer is...... wait for it...... .IT DEPENDS. SHOCKER!

The optimum dividend may be to take income up to £100K with the new dividend tax coming in next year.

Good point, UK Contractor Accountant but my friend has said that they don't want to take dividends if they have to pay tax on them (so they know that they'll only be able to take £5k next year).

With that information, are you in the Yes or No camp?

 

[UKSBD]

Why raise the salary when there is an extra £5,375 in income?

The extra incomes offsets the corporation tax saving but you still lose out on the extra personal NIC contribution

 

[kevin.doran]

My blog about it from earlier in the year...

The introduction of the NIC Employment Allowance last year added an extra dimension to remuneration planning for small limited companies. In a nutshell, employers can reduce the amount of National Insurance contributions they pay for their employees (more commonly known as Employers NIC) by up to £2000 per annum.

Salary

In years gone by, directors would tend to pay themselves at a level below both the tax and National Insurance thresholds, extracting anything further by way of dividend. However, with the EA now being a factor, it generally makes more sense to take a salary in line with the personal tax allowance. Although this approach will result in the director suffering a small NI deduction, the NI bill will be outweighed by the potential Corporation Tax saving.

As an example:

A gross salary of £10600 is paid. This amount is equal to the 2015/16 personal tax allowance meaning no income tax is due. There will however be 12% NI deducted on anything over £8060 which equates to £304.80. The key here though is the Corporation Tax saving of 20%. By paying the extra £2540 in salary (the difference between the NI limit of £8060 and the tax allowance of £10600), the company will save £508 in Corporation Tax. So, you’ve got a £508 CT saving for the company but a £304.80 NI deduction for the director, leaving you £203.20 better off overall.

Dividends

You can earn a further £31785 in addition to the £10600 salary before moving into the higher rate tax bracket. For earnings purposes, dividends come with a notional tax credit of 10%. You therefore need to multiply £31785 by 0.9 to get the real cash value of the dividend you can physically pay yourself. £31785 x 0.9 is £28606 which is therefore the maximum dividend you can take, in addition to the £10600 salary, before moving into the higher rate tax bracket.

In Summary

£10600 salary less £304.80 NI deductions (equivalent net value of £857.93 per month)

£28606 dividend (equivalent to £2384 per month)



The above assumes the director has no other income, the company has sufficient distributable profits to declare the dividend and the EA allowance is available

 

[Anonymouse72]

My blog about it from earlier in the year...


snip...
As an example:

A gross salary of £10600 is paid. This amount is equal to the 2015/16 personal tax allowance meaning no income tax is due. There will however be 12% NI deducted on anything over £8060 which equates to £304.80. The key here though is the Corporation Tax saving of 20%. By paying the extra £2540 in salary (the difference between the NI limit of £8060 and the tax allowance of £10600), the company will save £508 in Corporation Tax. So, you’ve got a £508 CT saving for the company but a £304.80 NI deduction for the director, leaving you £203.20 better off overall.

Dividends

You can earn a further £31785 in addition to the £10600 salary before moving into the higher rate tax bracket. For earnings purposes, dividends come with a notional tax credit of 10%. You therefore need to multiply £31785 by 0.9 to get the real cash value of the dividend you can physically pay yourself. £31785 x 0.9 is £28606 which is therefore the maximum dividend you can take, in addition to the £10600 salary, before moving into the higher rate tax bracket.

In Summary

£10600 salary less £304.80 NI deductions (equivalent net value of £857.93 per month)

£28606 dividend (equivalent to £2384 per month)



The above assumes the director has no other income, the company has sufficient distributable profits to declare the dividend and the EA allowance is available

have you got an updated version for 2016/17 rates etc. - basic tax code 1100L, notional 10% divi credit abolished?

 

[UKSBD]

The above assumes the director has no other income, the company has sufficient distributable profits to declare the dividend and the EA allowance is available

In the OP's case there is an extra income £5,000+

So by increasing his wages, would he not be losing out on the £304 NIC and then the corporation tax saving is offset by the tax on the extra £5k income.

Meaning an overall loss of £304 because he increased his wages.

 

[GGGSurrey]

Thanks Kevin for your input. As UKSBD says (and said earlier) the difference here is that my friend already has income that takes them over the £10 600 once they've decided they want to take the £8600 figure for NI qualification reasons.

The reason I posted the question is because I wondered how many people would just take the "Employers Allowance is applicable therefore £10 600 is the right figure" approach as being correct. rather than looking at all the figures.

My friend put this question to their accountant in roughly the format I do in the Original Post and received the response of, "yes that looks okay"....