Basics please help a newbie

[pr1]

So I've paid 26.5% on a 44k salary???
19% on the profit 7.5% on the dividends

A basic rate taxpayer earning 45k only pays 20%

Seriously confused.

+12% employees NI (National Insurance contribution) aka stealth income tax

[Goodbuddha]

Thanks so much so far, just to use your example:

Corporation Tax on £36.5k = £7.3k which leave £29.2k for dividends
.

What about the 7.5% dividends tax?

[WTFH]

Thanks so much so far, just to use your example:



What about the 7.5% dividends tax?

The dividends tax is PERSONAL not COMPANY

Please read the earlier comments about separating the two!

[Goodbuddha]

The dividends tax is PERSONAL not COMPANY

I totally get that.
Company pays tax on profits @ 19%

The example mentioned no dividends tax,
Hence my first post about being taxed 19% on profits and then taxed again! 7.5% on dividends over 5k
------------------
your company earned £45k then:
£8.5k salary leaves £36.5k
Corporation Tax on £36.5k = £7.3k which leave £29.2k for dividends (this will be taxed @ 7.5% = *£2,200)
Your total take-home after tax £36,069,
so you are over *£2k better off than a permie on £45k.
-------------------
Apologies I'm probably finding it hard to explain myself.

[WordIsBond]

Ok, you're a newbie, so I'll spell it out for you. There are several details you are getting wrong, but the really big thing you aren't factoring is employer and employee National Insurance both have to be paid on salaries.

You are being paid gross £82,500, and your salary is £8,424 (but we'll round to £8500 for simplicity). That's tax free. So far, we're ok, from there on your OP was wrong.

You next took out the £5K dividend. You can't do that yet. Dividends come out of profit and Corporation Tax must be paid first. You do not have £69K profit, you have £74K profit. Corporation tax (19%) will be £14060. Let's round it to £14K for simplicity. Your company (not you, YourCo) now has £60K in after tax profit. I hope you are with me.

I'm going to use 2018-2019 figures. I hope this works for you. You can have a personal allowance of £11,850 and a £2K dividend allowance, before any income tax. So that means you can have a total of £13,850 tax free, as long as at least £2K of it is dividends. You've already taken £8,500 in salary. So again rounding, let's say you can take another £5K tax free, in dividends. So you do that. You now have £13,500, tax free, and YourCo has £55K after tax profit.

You now take an additional £31.5K of dividend, and pay personal dividend tax of 7.5%. That's £2362.5. You have now received a total of £45K and have a dividend tax liability of around £2350, give or take a little. So after tax, you have £42,650 in your personal bank account. YourCo still has a reserve of £23.5K. (You could take that as a dividend and pay 32.5% but let's assume you don't, you keep it in reserve for now). YourCo has paid £14060, you've paid just overt £2K.

Now, for an alternative, you can save a load of Corporation Tax by paying yourself a salary of £45K. So let's see how that comes out.

YourCo:
It had £82.5K. It paid you £45K. That leaves £37.5K, right? Wrong. After the first £8K YourCo will pay 13.8%. So it's going to be a little over £5K, we'll round down to that. YourCo now has £32.5K. That's profit, so it is subject to Corporation Tax. Say goodbye to another £6.2K.

So if YourCo pays you a salary of £45K to save on Corporation Tax, it ends up with an after tax reserve of £26.5K. If you use a minimum salary and dividends to get to £45K, YourCo would have an after tax reserve of £23.5K. So it is better for your company to pay you salary, right?

But what about you? If you are paid £45K salary, you pay almost £4400 in National Insurance and £6630 in Income Tax. So a total of just over £11K, leaving you wtih £34K take home. That means you personally are more than £8K worse off, with a £45K salary, than with a minimal salary and dividends up to the £45K threshold.

So you can have your company be £3K worse off, pay dividends and pay more Corporation Tax.

Or you can have yourself be £8K worse off, pay salary and National Insurance and more Income Tax and less Corporation Tax.

This discussion does not deal with expenses, pension contributions, other benefits, etc.

[Goodbuddha]

Wow... firstly thank you everyone for helping and thanks to the last answer I "think" the penny is starting to drop. Sorry for antagonising anyone. Enjoy the weekend