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  1. #1

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    Question Taken the plunge - what next!!

    New to these boards and to contracting. I started my Ltd company in December and started trading in the new year. My accountants tell me what I can withdraw from my business account but I need to allow for personal tax liability.

    Can anyone give me a rule of thumb as to what that liability is? I'm VAT registered.

    Thanks for reading this far!


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    Ask your accountant. That's what he is there for. If you picked a freeagent one or one of the others with a portal you should see it on there.

    If not get them to do you a detailed tax plan showing you all this stuff.

    Asking a forum of strangers about your personal tax situation isn't really the way to go.

    That said I'm sure a friendly accountant will have a stab at it for you shortly.

    Also IMO you should be withdrawing the absolute minimum to live on and leave the rest in the business just in case your gig goes south and you end up with a period of no income. You can divi a large amount out in a few months just before tax year if you need to.
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    What are you paying yourself as a salary, if anything?

    How much do you expect to withdraw as a dividend, assuming sufficient profits?

    Your accountant should have explained to you the optimal salary/dividend split as they know all of the details needed to make a recommendation. Generally, the advice is to take a salary of £8040 a year and dividends up to the higher rate tax threshold. You'll pay no tax or NI on the salary, or any dividends up to the personal tax threshold. The first £5k of dividends above the personal tax threshold will also be tax free. The remaining dividends up to the higher rate are taxed at 7.5% and if you need to take any more the higher rate will be 32.5%.

    But the above is just generic, standard advice. It works for many but nobody here knows your exact details so there might be a reason why the above won't work for you.

    This is all really, really basic stuff so I'm surprised your accountant hasn't explained all of this to you already. You really need to spend some time talking through all this stuff with your accountant.

  4. #4

    Should post faster

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    General rule of thumb:

    Salary: £8,060
    Dividends: £34,940
    Taking your total income to the higher rate threshold.

    No taxes due on salary, £27,000 of dividends will be taxed at 7.5% = £2,025 personal tax liability.

    Salary: £11,000
    Dividends: £32,000
    Taking your total income to the higher rate threshold.

    No taxes due on salary, £27,000 of dividends will be taxed at 7.5% = £2,025 personal tax liability.

    However I imagine if you have just started contracting in December you probably had previous employment income that needs to be taken into account. Plus, if you have any other sources of income, this will impact it too.


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    Quote Originally Posted by LadyLen View Post
    New to these boards and to contracting. I started my Ltd company in December and started trading in the new year. My accountants tell me what I can withdraw from my business account but I need to allow for personal tax liability.

    Can anyone give me a rule of thumb as to what that liability is? I'm VAT registered.

    Thanks for reading this far!

    You're really better with your accountant doing this.

    Let's say you're on £500/day and work 200 days to keep calculations easy.

    Treat the VAT as straight pass through money. Depending what percentage you're on depends upon how much you actually make. Until April, you'll be on 13.5% - you'll make £19/day. From April, they're putting it up 2%, so you'll make £7/day. At the end of the first year, you'll lose the 1% first year discount so will be making £1/day. Don't touch it, pay it on time, treat it as not your cash.

    So, we've started with £600 coming in. Put the £100 VAT to one side.

    The next big one is expenses. If you live a short commute and don't need to claim anything for travel, don't. While some will frown at my advice, if you're spending less than a tenner a day on travel and subsistence, it's easier not to worry about it than mess around with receipts and so on.

    If you are dealing with expenses, you can do this in two ways - get a corporate credit card and put them all on there or pay for them personally then bank transfer the exact amount of expense back from the company into your personal account (as would have happened in the permie world except your permie co would do the transfer to you).

    You'll pay yourself a salary each month (see your accountant for payroll details)
    You'll pay your accountant a monthly fee
    You'll pay your insurance (PI/PLI) as required
    You'll pay any other professional memberships (IPSE, etc.)

    Your accountant will show you how to document these.

    You'll deduct these costs from your, based on 20 days, £12000.

    So, ball park figures:
    Start with £12000
    Deduct £2000 VAT
    Ten grand left.

    £25 per day commute - deduct £500
    £1500 salary bundle
    You're down to 8 grand
    Deduct other fees (£250)
    £,7750

    There's the profit figure

    Other optional items include pension plan, etc. but you will probably want to build a warchest first before worrying about that.

    Then look at corporation tax and dividends - see your accountant for a detailed break down, but you cannot pay a dividend if you haven't made a profit and you generally cannot overpay dividends to yourself. Essentially, take as little as you can for the first two years to build the war chest but your account should be explaining all this to you. You should be quite a few grand better off than going umbrella, even more so if you incur considerable expenses.
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    Thanks for the replies - I've been banging my head against the wall slightly with my accountant. I'm on a monthly invoice period and they don't go through this in finite detail until you submit the first invoice.

    I am the main breadwinner so I really need to know what my income will be and it's making my head spin to be honest.

    can I summarise and you can tell me if I have the right idea.

    January

    Worked 21 days

    500*21 = 10500 (ignoring VAT)


    subtract

    £500 Commute
    £150 Accountant fees
    £50 Insurance
    £300 incidental expenses
    £3583 (salary £8,060 + Dividends: £34,940 = 43000/12)

    equals £6234

    Personal tax liability on the salary above would be (7.5% of 27000 annually) £169 a month.

    SO my question is what happens to the £6234 I know there is corporation tax etc but how do you withdraw that profit?

    Sorry for the extra questions I realise this is not the ideal method but I need to plan ( I am a planner by trade)

    thank you.

    (using your example rate above thanks LondonManc)

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    Your calculations are a bit wrong.

    Don't confuse your salary and dividends. Your salary is a pre-tax expense for YourCo. Your dividends come out of post-tax profit. You can only take dividends if there is sufficient profit/reserves.

    Monthly income: £10500
    Expenses: £1000
    Salary: £671
    Net profit: £8829
    Corporation Tax @ 20%: £1765
    Retained profit after tax: £7064

    I've truncated the pennies. Make sure any expenses you are deducting are a) wholly and exclusively for business purposes or if they are out-of-pocket employee expenses (travel, subsistence etc.), wholly, exclusively and necessarily for the purposes of doing your job. Make sure you're aware in particular of the rules regarding travel and subsistence and make sure you understand IR35.

    If you're aiming to stay below the higher tax threshold, you would be looking to ideally take £2911/month in dividends, so that would leave you with £4153 of retained profit reserves.

    You may find it easier to pay dividends quarterly, so £8735/quarter though you haven't quite got the reserves to do that yet. Assuming these figures repeated monthly, after 3 months of paying monthly dividends, you'd have accumulated over £12k in retained profit and you'd have enough to start paying out dividends quarterly if you like. You should aim to build up at least a 6 month warchest (i.e. enough reserves to last you 6 months of paying regular dividends) but many prefer at least 12 months.

    Some people even prefer to take a single dividend lump sum at the beginning of the year (which you'd have to wait until year 2 to do) as this lets them keep it somewhere earning interest.

    As far as personal tax on the dividends goes, its probably easiest to just budget for £169/month as you say. Put it aside every month so you have enough to cover your first personal tax bill plus the first payment on account for the second year.

    Your net personal take-home each month would be £3413 (after deducting the £169/month).

    If you earn that amount each month for a year then you'll have accumulated a 12 month warchest by the end of year one, so keep it up!
    Last edited by TheCyclingProgrammer; 16th January 2017 at 19:12.

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    Oh goodie. A thread with numbers

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  9. #9
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    [QUOTE=LadyLen;2357665]Thanks for the replies - I've been banging my head against the wall slightly with my accountant. I'm on a monthly invoice period and they don't go through this in finite detail until you submit the first invoice.

    I am the main breadwinner so I really need to know what my income will be and it's making my head spin to be honest.

    can I summarise and you can tell me if I have the right idea.

    January

    Worked 21 days

    500*21 = 10500 (ignoring VAT)


    subtract

    £500 Commute
    £150 Accountant fees
    £50 Insurance
    £300 incidental expenses
    £833 salary (£10,000 a year which is what I pay myself, and is an expense that can be deducted before profit)

    equals £1833 (total costs)

    Monthly profit £8667 (£10,500 - £8667)
    corporation tax £1733.40 (on the profit above)

    Profit after tax £6933.60

    Now that profit of £6933.60 you can then withdraw as a dividend or save for a rainy day or a combination of the two.

    The big thing I'm missing out here is pension contributions but that's for another post..
    merely at clientco for the entertainment

  10. #10

    Should post faster

    Louisa@AardvarkAccounting's Avatar
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    Just make sure that if you have already had previous employment income, you bear that in mind too.

    For example, you already had earnings of £30,000, plus your salary of £672 per month for January to March 2017, then your total earnings would already be £32,016.

    This would only leave you with dividends of £10,984 before the higher rate threshold.

    Remember any dividends that go above the threshold, you'll have to pay 32.5% personally.

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