Salary/Dividends Tax threshold

[Ruprect]

I cannot envisage any circumstance where you would not be slightly better off overall (looking at amount received and what is retained if any) by ensuring you pay her a salary of 5225.

Of course, if she's not a director, and the revenue ask, she only works 2.5 days a week

[THEPUMA]

A couple of points:-

If you pay her a £7k salary there will be employer's and employee's NIC on the surplus over £5,225 ie an extra £422 NI.

If you pay her a large salary in one go between now and 05/04/08, if she isn't a director, there may be NI to pay even if it is below £5,225 for the year in total as employees' NI is dealt with differently to directors' NI.

If justifiable, probably the most tax (and NI) efficient solution would be for her self-employment business to charge you £7K for services rendered. Naturally, this assumes that she can justify self-employment in respect of these services.

[Lewis]

Don't forget that in the second example the company has less profit because it's expenses have gone up, also NI would be payable. [i.e. you don't have the 4k left.You have spent the entire 39k - though if the 4k was somehow left 75% of it would be a damn site better than nothing]

I cannot envisage any circumstance where you would not be slightly better off overall (looking at amount received and what is retained if any) by ensuring you pay her a salary of 5225.

You retain 100% of this amount. The company saves CT at 20% of this amount.

You lose effectively 10% tax credit of the amount of her S/E losses.

If you want to work it out with you actual numbers do an online tax return (not submitting it ouf course) with both sets of numbers. Just remember that increasing the salary increases expenses and thus reduces CT.

Yep, that was the plan. But I found it hard to justify the £5K salary. £3K seemed more reasonable based on market rates for admin and number of hours spent doing the work. I was warned by accountants that salary level needs to be reasonable and that 5K wasn't reasonable. But I suspect I am alone in this and everyone else is paying 5K!

[THEPUMA]

Yep, that was the plan. But I found it hard to justify the £5K salary. £3K seemed more reasonable based on market rates for admin and number of hours spent doing the work. I was warned by accountants that salary level needs to be reasonable and that 5K wasn't reasonable. But I suspect I am alone in this and everyone else is paying 5K!

Whilst in theory that should be a concern, I do no think HMRC would spend too much time and energy disputing a £5K salary.

I was once told of a case of a director paying his wife a salary of c£35K which HMRC disputed and it edned up going to court. The director argues that £35K was a fair market rate for someone who would type up his notes at 11pm at night and get up at 5am to allow him to run through a presentation. Apparently the judge agreed.

I've never bothered to try and find the case and it may be an urban myth (not a particularly interesting one perhaps) but I've always thought that the logic stacks up when HMRC try and argue that a secretarial rate is £10 per hour.

[Lewis]

Thanks for the help guys

[Gonzo]

Just to throw a small spanner into the works now that everyone seems to have understood everything - remember to count all your taxable income, including interest on your current account, if you are determined to stay below the higher rate tax threshold.

Although, unless you are getting oodles of interest it is not going to mean that an awful lot of extra tax will be due.

I don't know how you lot survive on such meagre amounts. Contractors these days.......

[richy]

Its easier to explain if I plug in some example numbers...

Say you have withdrawn £10k in dividends this tax year. That means there has also been £1,111.11 tax credit applied.

So out of the £39,825 before the higher rate tax threshold, you have £10500 in salary, £11,111 so far in dividends+tax credit so there is £18214 left for dividends+tax credit. I.e. you can withdraw £18214 x 90% = £16,393

I wonder why the tax credit is 11% of the dividend? Corporation tax is 20% this financial year as i recall ! maybe i missed something? thx richy

[BrowneIssue]

Note if you are director of you ltd company then there is no legal requirement for you to pay yourself NMW,

My previous accountant and my current accountant both told me it was illegal not to pay myself National Minimum Wage and that if investigated I could expect to get done for that.

[Diver]

So if we are all ipso facto shareholders now, in NR. do we get a share in any profits it makes?
How about a Divi for for the boys?

[Archangel]

I wonder why the tax credit is 11% of the dividend? Corporation tax is 20% this financial year as i recall ! maybe i missed something? thx richy

You did, there is no corrolation between the tax credit (10% of the gross divided) and either the corp tax rate, or the basic rate of tax. (simple tax system anyone?)