Advice on Salary Level

**kaiser78** · 29 October 2009, 21:04

Originally posted by lje View Post

Before you all shout at me I have had a search through the forum but I'm still confused about the best way to go!

I have taken the last academic year off as I was studying full time and so I haven't earned anything yet this tax year. I have just started contracting through my own limited company in which my husband is also an equal shareholder. As there are only 5 month's left in the tax year I won't earn quite enough to put me in the 40% tax bracket.

I understand that if I choose to pay myself at a high rate then the company will need to pay employer's NI and I will need to pay employee's NI. I also understand that normally people choose to pay a lower salary and take money out as dividends.

My main confusion is around paying corporation tax. Do I pay corporation tax (21%?) on the profit in the company before I take dividends and then pay income tax on the dividends too? In which case wouldn't I be better off paying my self a higher salary and the NI but avoiding the corporation tax? I'm sure there's a simple answer here that I'm missing.

Rule of thumb when operating through a limited company is to take monthly salary, but don't exceed the 0% tax bracket and the rest in dividends.

Best advice as most on here would agree is to seek the advice of a qualified accountant.

**MPwannadecentincome** · 29 October 2009, 21:40

Originally posted by lje View Post

My main confusion is around paying corporation tax. Do I pay corporation tax (21%?) on the profit in the company before I take dividends and then pay income tax on the dividends too? In which case wouldn't I be better off paying my self a higher salary and the NI but avoiding the corporation tax? I'm sure there's a simple answer here that I'm missing.

Yes this is the case you have to pay both. whether you are better off either way depends on your specific figures, work them out then decide.

**lje** · 29 October 2009, 22:10

Corporation Tax

Thanks guys. I can work out the sums - I just want to double check the way things work. On dividends you pay the corporation tax on profits first (21% at the moment) and then you pay the appropriate level of income tax on the dividend taken. Is that right?

**Gonzo** · 29 October 2009, 23:04

Originally posted by lje View Post

Thanks guys. I can work out the sums - I just want to double check the way things work. On dividends you pay the corporation tax on profits first (21% at the moment) and then you pay the appropriate level of income tax on the dividend taken. Is that right?

Don't forget that the dividend comes with a "tax credit" which satisfies all the tax due on the total amount of the dividend + tax credit for someone who is not a higher-rate tax payer. Only higher rate tax payers have further tax to pay due to the dividend.

It used to make sense when the dividend tax credit rate was the same as the lower rate tax rate but Gordon buggered about with it all

The important point is that lower rate tax payers don't have any further tax to pay on the dividend.

**lje** · 29 October 2009, 23:15

Ah

Ah OK - so if there was £1000 of profit (say) then £210 would be payable as Corporation Tax and then £790 could be paid as a dividend and no further tax be payable for a lower rate tax payer?

**jmo21** · 29 October 2009, 23:22

very basic example:

invoiced total: £50k

Pay self small salary of £10K
Other expenses of £2K
Total: £12k

After expenses: 50 - 12 = 38k

Pay corp tax of 21% on 38k = 7980

remaining: 38k - 7980 = £30,020

Lets say the upper earnings threshold for 40% tax is £35,000 (not the exact figure, can't remember off top of my head).

You've already paid £12k salary, so there is a remaining £23,000 before you hit the upper tax threshold

You can take the £23K as dividends and the tax credit Gonzo mentions, means you don't end up actually paying anything on it.

So now you've got £7000ish left in your company bank account. If you want to take any of this, you're now paying 40% tax

I think that's roughly it, did I make any mistakes? it's getting late!

(remember, I'm not sure of the upper tax threshold)

**lje** · 29 October 2009, 23:28

Thanks

OK - thanks guys. I've got it now! At last I'm understanding the maths.

I appreciate your time.

**Hex** · 30 October 2009, 12:11

Originally posted by jmo21 View Post

very basic example:

invoiced total: £50k

Pay self small salary of £10K
Other expenses of £2K
Total: £12k

After expenses: 50 - 12 = 38k

Pay corp tax of 21% on 38k = 7980

remaining: 38k - 7980 = £30,020

Lets say the upper earnings threshold for 40% tax is £35,000 (not the exact figure, can't remember off top of my head).

You've already paid £12k salary, so there is a remaining £23,000 before you hit the upper tax threshold

You can take the £23K as dividends and the tax credit Gonzo mentions, means you don't end up actually paying anything on it.

So now you've got £7000ish left in your company bank account. If you want to take any of this, you're now paying 40% tax

I think that's roughly it, did I make any mistakes? it's getting late!

(remember, I'm not sure of the upper tax threshold)

The only thing that I can see wrong is that the 23K you calculate as being able to take in dividends needs to include the tax credit. So you actually want to take out of the company 23K*0.9 in net dividends = 20700 in order to stay under the 40% tax threshold as per your example. On your tax return you would then put down net div as 20700 and tax credit of 2300 - giving gross div of 23K.

Advice on Salary Level