Upper or lower rate PAYE tax?

[ASB]

You personally will pay income tax at the lower rate on the extra salary, of course you will also pay NI and the employer will.

As for what is paid on the diviends well this is based on total income. This isn't changing so the 'top up' in higher rate tax isn't going to decrease.

Of course there are a whole load of online tax calulators you can play "what if" with.

[lje]

I've just put together a quick spreadsheet for this (yes - I know I'm sad).

If you have a salary of £10,000 I get...

Salary £10,000
Dividends £60,000

Employee NI £471
Employer NI £1,280
Salary Income Tax £706
Dividend Income Tax £12,600
Div Corporation Tax £5,226
TOTAL £20,283

Mat. Pay £1,038

Total In £50,755



If you have a salary of £20k I get...



Salary £20,000
Dividends £50,000

Employee NI £1,571
Employer NI £2,560
Salary Income Tax £2,706
Dividend Income Tax £10,500
Div Corporation Tax £5,226
TOTAL £22,563

Mat. Pay £2,077

Total In £49,514


So it looks like you might be best off with the lower salary. Of course my spreadsheet could be wrong! PM me if you'd like me to send you the speadsheet.

[mobwell]

You seems to be under the impression that once you pass the 40% threshold, all your income is taxed at 40%. It isn't. The first 5K ish is income tax free, the next 33K ish is at 20%, and the rest at 40%.

If it was just income tax what you're doing wouldn't make that much difference, but you're voluntarily paying a lot more NI this way.

And get an accountant that you can contact.

No, I understand that tax is tiered up to the 40% tax band, what I'm not clear on is whether the dividends and PAYE are added together to take me into the higher tax band or if I only have to worry about staying below it with the PAYE part.
So, to clarify. If I pay myself £25K PAYE and £45K dividends how much tax and NI does the PAYE part attract? Is any of it in the higher band?

[Clare@InTouch]

No, I understand that tax is tiered up to the 40% tax band, what I'm not clear on is whether the dividends and PAYE are added together to take me into the higher tax band or if I only have to worry about staying below it with the PAYE part.
So, to clarify. If I pay myself £25K PAYE and £45K dividends how much tax and NI does the PAYE part attract? Is any of it in the higher band?

If you pay £45k in dividends it's actually £50k for tax purposes. This gives you total income of £75k.

The £25k in PAYE will be taxed first, then the dividend income. Dividends within basic rates are taxed at 10% (but they come with the 10% tax credit, so effectively zero) and dividends that fall into higher rates are taxed at 32.5% (less the 10% tax credit = 22.5%).

Dividends are always taxed last, so no, your PAYE part would not fall into higher rates. But there would be tax due on the dividends that do.

[mobwell]

I've just put together a quick spreadsheet for this (yes - I know I'm sad).

If you have a salary of £10,000 I get...

Salary £10,000
Dividends £60,000

Employee NI £471
Employer NI £1,280
Salary Income Tax £706
Dividend Income Tax £12,600
Div Corporation Tax £5,226
TOTAL £20,283

Mat. Pay £1,038

Total In £50,755



If you have a salary of £20k I get...



Salary £20,000
Dividends £50,000

Employee NI £1,571
Employer NI £2,560
Salary Income Tax £2,706
Dividend Income Tax £10,500
Div Corporation Tax £5,226
TOTAL £22,563

Mat. Pay £2,077

Total In £49,514


So it looks like you might be best off with the lower salary. Of course my spreadsheet could be wrong! PM me if you'd like me to send you the speadsheet.

Thanks for that. Very helpful in understanding the income tax and NI implications on an increased PAYE. I'm not clear on the dividend part of your calculations though. I don't know what dividend corporation tax is.

The whole thing is very complicated. If I pay myself more PAYE my company has less profit and hence my corporation tax bill is lower. Also any maternity pay received is also subject to tax and NI so this too needs to be taken into account.

As I understand it PAYE will cost me 31% tax (20% income tax + 11% NI) and the company 12.8% NI.

I think if I'd paid myself as a dividend then I would pay 25%? tax and the company would have paid 22%? corporation tax instead as this is now extra profit.
Is this right?

If I wanted to increase my maternity pay much higher I could pay myself the extra £10K in my last 2 pay packets as the average weekly earnings is calculated on an 8 week period 15 weeks before birth. If I did this then I'd get £6-7K maternity pay for that 6 week period which my Ltd company could then just claim back from the government, although I assume the employer NI is not claimable.

[escapeUK]

What's wrong with taking maternaty pay from your own Ltd?

And as far as being a disguised employee that's bollocks, there is no disguise at all, I am and employee of my Ltd Company, but not of my Ltd Companies clients.

Ah. You've got confused somewhere. Women going on maternity leave are taking the **** out of the company they work for (with the governments help) and this is the reason I would never consider employing a woman of breeding age.

Obviously the fact you have employed yourself must make this ok and your just deserts, depending how you look at it? lol

[blacjac]

Maternity pay???????? You madam are a disguised employee!

What's wrong with taking maternaty pay from your own Ltd?

And as far as being a disguised employee that's bollocks, there is no disguise at all, I am and employee of my Ltd Company, but not of my Ltd Companies clients.

Ah. You've got confused somewhere. Women going on maternity leave are taking the **** out of the company they work for (with the governments help) and this is the reason I would never consider employing a woman of breeding age.

Obviously the fact you have employed yourself must make this ok and your just deserts, depending how you look at it? lol

Is that really the point you were making or are you now back peddling because you made a mistake?

What is the connection between getting paid maternity pay and being a disguised employee?

[The Wikir Man]

Ah. You've got confused somewhere. Women going on maternity leave are taking the **** out of the company they work for (with the governments help) and this is the reason I would never consider employing a woman of breeding age.

Obviously the fact you have employed yourself must make this ok and your just deserts, depending how you look at it? lol

I really hope that that is meant in jest rather than being serious.

Even so, if I own the company, and I take maternity pay (or SSP for that matter), how can I be "taking the **** out of the company"? These things are statutory rights of employees, for goodness sake.

[lje]

Thanks for that. Very helpful in understanding the income tax and NI implications on an increased PAYE. I'm not clear on the dividend part of your calculations though. I don't know what dividend corporation tax is.

I've looked at all of the tax which you would pay on your money. As dividends are paid out of profit you have to pay corporation tax on the profit before you take the dividends. If you paid it out as salary you wouldn't have to pay the corporation tax.

The whole thing is very complicated. If I pay myself more PAYE my company has less profit and hence my corporation tax bill is lower. Also any maternity pay received is also subject to tax and NI so this too needs to be taken into account.

As I understand it PAYE will cost me 31% tax (20% income tax + 11% NI) and the company 12.8% NI.

I think if I'd paid myself as a dividend then I would pay 25%? tax and the company would have paid 22%? corporation tax instead as this is now extra profit.
Is this right?

If you pay yourself a dividend then you'll have to pay 21% corporation tax on the profit before you take the dividend (I think it's going up to 22% at some point but I'm not sure when...). For the part of the dividend which comes in below the 40% tax limit (taking into account salary too) you are already considered to have paid the tax due because you paid your corporation tax. For the amount of the dividend over the 40% tax limit you would have to pay an additional 22.5% income tax.

If I wanted to increase my maternity pay much higher I could pay myself the extra £10K in my last 2 pay packets as the average weekly earnings is calculated on an 8 week period 15 weeks before birth. If I did this then I'd get £6-7K maternity pay for that 6 week period which my Ltd company could then just claim back from the government, although I assume the employer NI is not claimable.

You don't have to actually increase your salary - you could pay yourself a one off bonus for being such a great employee and as long as it's in the appropriate time period your maternity pay will be calculated including the bonus.

I'm going to go away and crunch my numbers again as I might have underestimated your maternity pay...

[lje]

I'm going to go away and crunch my numbers again as I might have underestimated your maternity pay...

OK. I've changed it so that the bonus is defined separately (rather than my bad assumption that your salary would be paid out evenly over the year) and I've also corrected a couple of other small issues, including the fact that I wasn't calculating the tax/NI for the maternity pay.

Oddly my results seem to indicate that it doesn't matter what you do you still get roughly the same money in - unless you can afford to pay a really large bonus during the qualifying period...

Salary £10,000
Bonus £0
Dividends £60,000
Maternity Pay £1,038

Employee NI £586
Employer NI £1,413
Salary Income Tax £914
Dividend Corp Tax £12,600
Dividend Income Tax £6,113
total tax £21,625

Total In £49,413



Salary £10,000
Bonus £10,000
Dividends £50,000
Maternity Pay £7,788

Employee NI £2,428
Employer NI £3,557
Salary Income Tax £4,264
Dividend Corp Tax £10,500
Dividend Income Tax £7,632
total tax £28,380

Total In £49,408



Salary £10,000
Bonus £20,000
Dividends £40,000
Maternity Pay £14,538

Employee NI £4,204
Employer NI £5,701
Salary Income Tax £7,747
Dividend Corp Tax £8,400
Dividend Income Tax £9,000
total tax £35,053

Total In £49,486



Salary £10,000
Bonus £30,000
Dividends £30,000
Maternity Pay £21,288

Employee NI £4,372
Employer NI £7,845
Salary Income Tax £14,447
Dividend Corp Tax £6,300
Dividend Income Tax £6,750
total tax £39,714

Total In £51,574


Salary £10,000
Bonus £60,000
Dividends £0
Maternity Pay £41,538

Employee NI £4,874
Employer NI £14,277
Salary Income Tax £32,520
Dividend Corp Tax £0
Dividend Income Tax £0
total tax £51,671

Total In £59,867


Please feel free to PM me if you'd like the spreadsheet.