Salary vs Dividends with a Rental Property

[RossT87]

Hi all,
I’m new to this, so apologies if this is in the wrong section etc.

I am 35 and have my own limited company and I am trying to figure out if taking a small salary is beneficial over taking dividends.
There is plenty advise out there, but the complication for me is I have a buy to let property in my personal name. This creates a taxable income of approx. £15k so uses up all of my personal allowance.

I am weighing up two options:
(For simplicity I am assuming basic rate tax applies)

1. Dividend only.
Pay corporation tax at approx. 20%, use the divided allowance of £2k and pay dividend tax at 8.75%.
So the effective tax rate is somewhere around 25% with the dividend allowance.
Make no national insurance contributions and have self-managed investments and no state pension. Plus, no furlough pay etc. if we have more lockdowns!

2. Small salary.
Pay a small salary. Enough for state pension (about £9k per year?). Pay national insurance on this (about 15%?) plus income tax at 20% plus £200 a year accountancy fees for pay roll. I believe corporation tax would not apply here. So, the effective tax rate is approximately 35%

Any advise on this is greatly appreciated. I’ve asked a few accountants and got different opinions. The younger ones tend to be pessimistic about the state pension and suggest option 1, the older ones are much keener on option 2!

Thanks.
Ross

[eek]

Hi all,
I’m new to this, so apologies if this is in the wrong section etc.

I am 35 and have my own limited company and I am trying to figure out if taking a small salary is beneficial over taking dividends.
There is plenty advise out there, but the complication for me is I have a buy to let property in my personal name. This creates a taxable income of approx. £15k so uses up all of my personal allowance.

I am weighing up two options:
(For simplicity I am assuming basic rate tax applies)

1. Dividend only.
Pay corporation tax at approx. 20%, use the divided allowance of £2k and pay dividend tax at 8.75%.
So the effective tax rate is somewhere around 25% with the dividend allowance.
Make no national insurance contributions and have self-managed investments and no state pension. Plus, no furlough pay etc. if we have more lockdowns!

2. Small salary.
Pay a small salary. Enough for state pension (about £9k per year?). Pay national insurance on this (about 15%?) plus income tax at 20% plus £200 a year accountancy fees for pay roll. I believe corporation tax would not apply here. So, the effective tax rate is approximately 35%

Any advise on this is greatly appreciated. I’ve asked a few accountants and got different opinions. The younger ones tend to be pessimistic about the state pension and suggest option 1, the older ones are much keener on option 2!

Thanks.
Ross

Dread to think how crap those accountants recommending you don't take a salary are.

Ignore the pension. The cheapest way of extracting the first £12,500 from your company is via PAYE payroll as the NI costs are minimal.

[Lance]

What makes you think you need to take £9k to get state pension? I might be wrong but I don't think you actually need to make any NI contributions to get the benefit, but either way I take just under £12k and will get a full year of state pension entitlement.

And how have you got to 35 without any state pension?

But I agree with Eek. The accountants you have spoken to sound pretty crap. Take c. £12k salary (oh and sell the BTL before the arse totally falls from that market).

[jamesbrown]

What makes you think you need to take £9k to get state pension? I might be wrong but I don't think you actually need to make any NI contributions to get the benefit, but either way I take just under £12k and will get a full year of state pension entitlement.

And how have you got to 35 without any state pension?

But I agree with Eek. The accountants you have spoken to sound pretty crap. Take c. £12k salary (oh and sell the BTL before the arse totally falls from that market).

Absent credits (e.g., for being a carer), you need to earn £123 per week or £6,396 per year to earn a qualifying year for the state pension of which you require 35 for the full state pension, currently and for what it’s worth.

[Maslins]

Key thing is NICs won't be impacted by your BTL property. Ie the small salary will still be NIC free, even though you have £15k annual income elsewhere (and this would apply even if that £15k was another salary).

It won't be free from personal tax, but the NIC free bit is sufficient for it to be worthwhile. Means roughly speaking you're looking at 20% personal tax vs 19% corporation tax + 9% dividend tax = 28%.

As alluded to, the salary also gives the perk of counting as a contributing year for state pension (BTL and dividends on their own wouldn't).

[northernladuk]

[SIZE=14px]There is plenty advise out there,
Any advise on this is greatly appreciated.

It's ADVICE!

And get yourself a good accountant recommended by other contractors who are usually in exactly the same situation as you so they are experienced with your exact situation.

Maslins who has responded is one of them. Give them a call, engage them and then don't worry. If you find Chris is a bit scary there are other accountants recommended on a thread that is stickied at the top.