Optimal Salary/Dividend Split - Doubting Accountant

[northernladuk]

Don't forget to get a good warchest up as soon as you can. The bench seems to be a little more crowded nowadays!

[Clare@InTouch]

You are correct in that I have been advised to set a £12k salary in order to avoid any unwanted attention from HMRC; is there any truth to this? With a salary set at £12k I am now trying to take out as much cash as possible as dividends without paying additional tax. I think the £27k set by my accountant might factor in the 10% tax credit but I won't to make sure I'm not wasting any tax free allowance.

Illegal dividends won't be a problems, I will only be paying a dividend every 3 months and will have plenty left over.

Again, I will be discussing this further next week with my accountant but looking to get some viewpoints from other contractors.

Cheers,
Graeme

The dividends would factor in the tax credit - £27,000 grossing up to £30,000. Add that to the salary of £12,000 and you get £42,000.

Assuming you have a normal tax code of £7,475 then, added to the higher rate limit of £35,000, you can have £42,475 before higher rate tax kicks in.

The difference of £475 gives you a bit of a buffer for things like bank interest/other income.

Any gross dividends paid over the higher rate limit are subject to tax at 32.5% less the 10% tax credit = 22.5%. This equates to 25% of the net amount.

You could lower your salary if you wanted to, and look into the option of making your spouse a shareholder (if applicable).

[Danielsjdaccountancy]

Hello All,

I am about to commence my first contract and am currently in the process of setting my salary and dividend split. After speaking with my accountant they advised the following:

• Salary: £12k
• Dividend: £29k

This would result in around £1104 tax on salary and no tax on dividend which is fine, I will be setting my salary at £12k.

My question is can I extract more as a dividend? My accountant is recommending sticking with this and informed me that any more as a dividend will start to result in a 25% tax hit. From my understanding I have a £7475 tax free allowance and a £35k lower band allowance which totals £42475. Shouldn't this mean I should be able to take an additional £3475? Also I'm not sure why it's taxed at 25%.

I will be returning to speak to my accountant but would like to clarify a few things first.

Cheers,
Graeme

Hi Graeme,

Not sure if it’s a typo but, unless you're paying into a person pension, £12K salary plus a net dividend of £29K gives you a personal tax liability of £436.80, you need to take a £27K dividend to have no liability.