Do different tax codes alter the optimum tax-efficient salary rate?

[workstation]

Does tax code affect what salary is most tax efficient?

I'm guessing it doesn't, but I'm not sure.

I have a lower tax code than usual so that HMRC can collect some higher rate tax on investment dividends via it. Possibly this is a bit pointless now I am a contractor, but that's the situation.

Is my optimum salary affected, and if so, why?

Could it ever be in my interest to just pay the tax and get the tax code changed? Making quarterly payments sounds inconvenient, but is there anything other than that?

[malvolio]

Sigh....

Your tax code sets your personal allowance, after which you start paying tax. So what do you think?

[DaveB]

Sigh....

Your tax code sets your personal allowance, after which you start paying tax. So what do you think?

He doesn't know, thats why he's asking. This is one of the professional forums Mal, a bit bit more helpfulness and a bit less snarkiness is probably called for.

To the OP, if you have anything other than a straightforward tax setup you are probably best off talking to your accountant. They should be able to advise you on the correct course to take based on your circumstances.

Under normal circumstances your tax code dictates the point at which you start paying tax. Most peoples will match the current basic rate threshold (£10,600) for 2015/16 IIRC. General opinion is that the most tax efficient salary for a contractor running a LTD is to take this which works out to £833 a month but also requires you to make use of the the £2000 NI discount for small companies to offset some of the NI costs that come with it. Otherwise you take a salary up to the NI threshold (I forget what that is atm).

Depending on what your Tax code actually is then the £833 pm may not be the most effective and you may be better off with the lower NI threshold salary instead. Or somewhere in between, or neither.

As above, talk to your accountant.

[malvolio]

He doesn't know, thats why he's asking. This is one of the professional forums Mal, a bit bit more helpfulness and a bit less snarkiness is probably called for.

OK, fair comment - but do you pitch up for a new venture without having just a little inkling of the basics?

This comes back to our basic problem: we don't treat contracting as a job...

[dty]

He doesn't know, thats why he's asking.

Amen.

Otherwise you take a salary up to the NI threshold (I forget what that is atm).

£671 pcm.

[Jessica@WhiteFieldTax]

Yes and no.

Yes, in so far as a tax code is a reflection, if it's correct, of other income.

No, in so far as the tax code is a collection tool, the thing that matters is actual income for year.

So, question is why does your tax code differ to standard allowances? That will lead you to an answer. For example if you have other income coded out, eg rent, it may be sensible to drop the salary to NI threshold. However if the tax code is reduced due to previous years tax underpayment coded out then that doesn't effect looking at the overall salary/dividend/allowances mix for this year.

And talk to your accountant.