Personal & Corporation Tax Confusion-Am I overpaying?

[latte]

Dear all,

I recently started trading as a limited company and have been surprised at the tax I still need to pay. Adding up the paye, NI, dividends and corporation tax incurred, as regardless of tax type it's still mine to pay, I don't think I'm better off.

I'm new to this and would appreciate any advice. I used to contract via a UK umbrella/paye and paid fairly high tax (I think it averaged c35% instead of 40% after fees) and expected bigger reductions via a Ltd.

In my first year of Ltd trading I billed around £94k (exc vat). I paid myself £20k total through paye (paye etc was c£6500 on top), plus £42k dividends before tax. I'm now advised I need to pay c£10k tax on the dividends and £14k corporation tax. This puts my tax at £6500+£10k+£14k=£30.5k.

Surely if I'd gone through an agency/std paye again, even with a 22% and then 40% high personal tax, I'd have been hit by a similar amount of tax on £95k gross?

Can't see a saving - am I missing something?
I'm asking my accountant but would appreciate any advice from the forum..

Thanks

[JonSmile]

paying a high dividend will encur extra tax

Salary = £20,000
Net dividend = £42,000
Other income = £0
Tax code = 647L
Tax year = Fiscal Year 2009/2010.
Dividend Information
The gross dividend is £46,666, making your total gross income £66,666
You are a higher rate tax payer (limit is £37,400). Extra tax is payable on dividends
£22,787 of your gross dividend income is subject to further tax at 22.5%
The extra tax to pay is £5,127 (12.2% of net dividend)

And yes on the CTax,
assuming limited expenses and ignoring vat profits due to FRS
GP 94k
Exps
£20 sals
£6.5k Paye
Net Profit 67.5k
21% tax £14.3k
Retained for dividend - £53k

[malvolio]

One of the myths of freelancing is that we don't pay much tax. If you add it all up, we actually put quite a bit more in the nation's coffers than most permies. If you're careful, you do get to keep a higher proportion of your gross, but it's still serious money.

Still, look on the bright side: next year, when we get a government that might actually do some governing, I suspect we'll all be paying a lot more...

[ASB]

Shut up, stop winging and look at the amount the government would have off somebody on a 94k salary.

Though to be helpful:-

The only sure way to ensure less of your income is exposed to tax is to earn less. You do have some control of course. you chose to expose yourself to higher rate tax on the dividends by taking that amount. That was your choice.

You chose to expose 20k of your income to PAYE and NI by taking a salary of 20k. That was your choice.

In your position you could save yourself instantly about 3k by paying a salary equivalent to your tax allowance rather than 20k (anybody who says you can't do this is currently wrong unless you have a service contract in which case they are right).

You could have saved yourself a further 5k by keeping your total income to 38k. Of course that may not be enough to fund the lifestyle you expect.

By all means go back to brolly. You would pay approximately:-

10k er NI
4.6 ee NI
23.5 tax

Net. 55.9

In essence if you are going to extract all available funds from the company all you will save is the NI. About 15k in your case.

[Maslins]

Surely if I'd gone through an agency/std paye again, even with a 22% and then 40% high personal tax, I'd have been hit by a similar amount of tax on £95k gross?

Main thing you're missing is national insurance. I'll ignore expenses in the below calculations.

If you were paid via an umbrella and you billed £94k, you'd suffer about £10k employer's NI, and about £4-5k employee's NI, total almost £15k.

On your PAYE salary of £20k, you'll have only paid ~£2k e'ers NI & a slightly lower amount of e'ees NI, totalling under £4k.

Depending upon your longer term plans and how much cash you need to draw out, you could cut your tax bills via a Ltd significantly by reducing the salary to ~£5k and paying ~£35k as dividends. That would lead to a total tax liability based on £94k of ~£19k...with the only problem being you've left £35k in the company bank account.

[Maslins]

Shut up, stop winging and look at the amount the government would have off somebody on a 94k salary.

Though to be helpful:-

The only sure way to ensure less of your income is exposed to tax is to earn less. You do have some control of course. you chose to expose yourself to higher rate tax on the dividends by taking that amount. That was your choice.

You chose to expose 20k of your income to PAYE and NI by taking a salary of 20k. That was your choice.

In your position you could save yourself instantly about 3k by paying a salary equivalent to your tax allowance rather than 20k (anybody who says you can't do this is currently wrong unless you have a service contract in which case they are right).

You could have saved yourself a further 5k by keeping your total income to 38k. Of course that may not be enough to fund the lifestyle you expect.

By all means go back to brolly. You would pay approximately:-

10k er NI
4.6 ee NI
23.5 tax

Net. 55.9

In essence if you are going to extract all available funds from the company all you will save is the NI. About 15k in your case.

This post wasn't there when I started mine, but yeah, what he said!

[ASB]

That would lead to a total tax liability based on £94k of ~£19k...with the only problem being you've left £35k in the company bank account.

Of course that is 35k that can be extracted with no further tax to pay - provided at the point of extraction the individual is not a higher rate taxpayer. In any event all those 35k over a number of years can be extracted with only paying minimal extra due to entrepreneurs relief. Or they could be lobbed in a pension or they could be .......

Fact is 19k on 94k isn't bad. I pay a lot more on a lot less. Also with careful planning and income shifting etc one can extract pretty much all of it at the time of earning with no further tax to pay.

[latte]

Personal & Corporation Tax Confusion-Am I overpaying?

Thanks all,

Appreciate all the input, L.