The new 7.5% dividend tax and how it affects NI
Contractors with limited companies who believe they are at low risk of being inside of IR35 and have declared themselves outside for that reason may still, because of the uncertain nature of IR35, decide to calculate and set aside their IR35 liability. Up until the end of the 15-16 tax year if you are paying yourself a salary up to the tax free threshold, paying a little national insurance on this and drawing the rest via dividends, this was a fairly easy sum to calculate. However, as of 16-17 the new dividend tax has added more uncertainty for some.
My question is… If you were to declare yourself outside of IR35 but wanted to put the money aside, would you be able to deduct the money you have paid via the dividend tax from potential NI? (I ask because if someone is paying NI because their income is deemed as employment income, then surely that money can’t be considered company dividend income too?).
A nice simple example for clarity (16-17 tax year):
• You take £30000 in a year
• You have £1500 in expenses
• You pay yourself a wage of £10800
• You pay corporation tax of around £3540
• You receive dividends of around £14160
• You pay the new tax on your dividends of about £1062 (@7.5%)
• You pay about £700 in employee and employer NI on the amount between the NI thresholds and the wage you paid yourself (assuming you don’t qualify for the employment allowance, again for clarity)
Now correct me if I’m wrong but if you did want to calculate the difference for being inside IR35 then it would be (NI rates taken as 15-16 rates):
• 30000 – 1500 – 10800 - 3540 = 14160
• 14160 x 0.138 = £1954 (employer)
• 14160 x 0.12 = £1699 (employee)
• = £3653 total
So would it be £3653?
OR would I be right in thinking that if it was ever decided all your contracts were inside IR35 then the dividends would be treated as a wage so £3653 – 1062 (which you paid in the new dividend tax) = £2591
What do people think?
Tom
Contractors with limited companies who believe they are at low risk of being inside of IR35 and have declared themselves outside for that reason may still, because of the uncertain nature of IR35, decide to calculate and set aside their IR35 liability. Up until the end of the 15-16 tax year if you are paying yourself a salary up to the tax free threshold, paying a little national insurance on this and drawing the rest via dividends, this was a fairly easy sum to calculate. However, as of 16-17 the new dividend tax has added more uncertainty for some.
My question is… If you were to declare yourself outside of IR35 but wanted to put the money aside, would you be able to deduct the money you have paid via the dividend tax from potential NI? (I ask because if someone is paying NI because their income is deemed as employment income, then surely that money can’t be considered company dividend income too?).
A nice simple example for clarity (16-17 tax year):
• You take £30000 in a year
• You have £1500 in expenses
• You pay yourself a wage of £10800
• You pay corporation tax of around £3540
• You receive dividends of around £14160
• You pay the new tax on your dividends of about £1062 (@7.5%)
• You pay about £700 in employee and employer NI on the amount between the NI thresholds and the wage you paid yourself (assuming you don’t qualify for the employment allowance, again for clarity)
Now correct me if I’m wrong but if you did want to calculate the difference for being inside IR35 then it would be (NI rates taken as 15-16 rates):
• 30000 – 1500 – 10800 - 3540 = 14160
• 14160 x 0.138 = £1954 (employer)
• 14160 x 0.12 = £1699 (employee)
• = £3653 total
So would it be £3653?
OR would I be right in thinking that if it was ever decided all your contracts were inside IR35 then the dividends would be treated as a wage so £3653 – 1062 (which you paid in the new dividend tax) = £2591
What do people think?
Tom
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