Optimal Salary/Dividend Split - Doubting Accountant

[graeme86]

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

[Wanderer]

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.

Why do you think £12k salary is OK? If you lower your salary to £7k then you will save £1104 in tax...

[kingcook]

You can take a salary of £7072, and the rest as dividends.

There's been talk recently of taking more salary than this to stay off HMRC's IR35 radar.

Have a quick search

[prudent consulting limited]

illegal dividends

I hope you have also considered the issue of illegal dividends which can be costly. This very common with contractors. They take all the money from the company and end up with negative reserve.

[kingcook]

Yes - always leave a bit in the company bank account to pay for e.g. PI insurance premiums, accountancy fees, other stuff, etc etc

[Cr1spy]

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?

The income tax allowance doesn't work like that. Dependant on your tax code, you can earn up to £7475 without incuring income tax. All income over that amount (up to £35000) is taxed at the lower rate (20%). Earnings over this amount are taxed at 40%. There is an even higher rate, but as I have never reached that much, I don't recall the exact details.

[graeme86]

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

[SueEllen]

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?

Have a read of all the other threads.

Personally I find tax investigation insurance (any way you buy it) much cheaper than the £1104 you will pay in tax and NI and the risk of having a tax investigation.

(Again you can find out more about this via searching.)

[Crack Addick]

Try this current thread


http://forums.contractoruk.com/accou...confusion.html

[graeme86]

Thanks for the advice and pointers, I'll be proceeding with £7.5k salary, dividends up to the lower tax limit and spending a little extra on IR35 cover.