Dividend IR35 status change issue

[oafc0000]

What counts as earnings towards the higher tax rate for dividend payments ? Is it just salary or is it the amount I take from dividend payments as well ?

My first contract started in April and it was IR35 caught...

I earned about 30k Net on my invoices and my salary payment is about 25.5k Gross (numbers arent perfect but hopefully enough there too help)...

I am now switching to a contract which is not IR35 caught...and I have six months in this tax year left. I was planning on paying myself NMW approx 5.5k on this six month contract and then taking the rest as a dividend.

This would put my gross somewhere near 31k and under the higher tax boundary for the extra tax on dividends? or does the payments from the dividends smack me right over the threshold ?

Im pretty confused on the whole issue...anyone care to sort my head out on the issue on what I am best doing!

Thanks for any help, let me know if you need more information!

[NotAllThere]

Originally Posted by oafc0000

...I earned...

I earnt

[oafc0000]

Originally Posted by NotAllThere

I earned

Corrected...

[Sockpuppet]

Originally Posted by oafc0000

I am now switching to a contract which is not IR35 caught...and I have six months in this tax year left. I was planning on paying myself NMW approx 5.5k on this six month contract and then taking the rest as a dividend.

Remember that dividends are (dividend amount / 0.9) = amount taxed on.

So that "lowers" the HT threshold.

Taking it all as dividends will land you in ht territory.

[oafc0000]

Originally Posted by Sockpuppet

Remember that dividends are (dividend amount / 0.9) = amount taxed on.

So that "lowers" the HT threshold.

Taking it all as dividends will land you in ht territory.

Im understanding how it works now..kind of...

I take it that earnings under the threshold are charged at the lower rate and I only pay the higher rate on the part that goes over ? Much like standard income tax ?

In that case im better off leaving as much in as possible this tax year and taking it out next year when I have more room to move ?

Thanks

[Sockpuppet]

Originally Posted by oafc0000

Im understanding how it works now..kind of...

I take it that earnings under the threshold are charged at the lower rate and I only pay the higher rate on the part that goes over ? Much like standard income tax ?

In that case im better off leaving as much in as possible this tax year and taking it out next year when I have more room to move ?

Thanks

Bingo.

AFAIK dividends over the higher tax rate are less effective than just doing PAYE. I could be wrong though.

[ASB]

Originally Posted by Sockpuppet

Bingo.

AFAIK dividends over the higher tax rate are less effective than just doing PAYE. I could be wrong though.

I can't see any circumstances where it would be better to pay PAYE unless the company is in the higher CT band. (In any event PAYE income is counted first towards the threshold anyway.)

In the normal CT band a 100 gross income paid as salary will actually yield < 500 to the employer after allowing for employers NI. A dividend will yield 592 after allowing for higher rate tax.

A possible exception might be a foreign employer with no UK branch and them not paying ER's NI (an unusual but possible situation).

[oafc0000]

Originally Posted by Sockpuppet

Bingo.

AFAIK dividends over the higher tax rate are less effective than just doing PAYE. I could be wrong though.

Surely taking it as a dividend is still better than PAYE ?

If I go into the HT band then I am taking off CT at 21% and then HT at 22.5%...

Surely thats better than taxing it at full PAYE at 40% income tax, employee national insurance and employer national insurance ? Or am I totaly missing the point again ?