Paying yourself under threshold

[Hughar]

Hi,

New to limited company, been contracting through umbrella for a while.

Been told by my accountant to pay myself £400 per month then dividends without PAYE, fine.

On the website, here: HM Revenue & Customs: PAYE for employers: the basics it claims you can pay yourself £442 per month no problems. Assuming I started trading at the beginning of the month can't i pay myself this higher rate?

Thanks!

[SueEllen]

Your accountant is out of date the threshold to ensure you are credited with NI distributions has gone up.

Talk to your accountant again and tell him/her what you have found.

If they don't give you a good and clear explanation for why they have given you the advice they have immediately change accountants.

There are a few that frequent this board and give answers to questions so use the search facility.

[ASB]

Hi,

New to limited company, been contracting through umbrella for a while.

Been told by my accountant to pay myself £400 per month then dividends without PAYE, fine.

On the website, here: HM Revenue & Customs: PAYE for employers: the basics it claims you can pay yourself £442 per month no problems. Assuming I started trading at the beginning of the month can't i pay myself this higher rate?

Thanks!

If you have not taxable income from elsewhere then 7475 pa is probably ideal. This being the 'standard' personal allowance. Obviously your allowance may be different.

However don't forget to take off this whatever you have earned already in the tax year, potentially from other employers. (If you have salary of > 7475 already from elsewhere there is no point in paying yourself any salary at all - in terms of tax efficiency).

On 7475 you will pay a little NI (approx 85 pa). You could potentially try and ensure your annual income is 7072 - the secondary NI threshold then no NI is paid (check if you still get a years pension credit). In this case you will pay (7475-7072) * .2 = 80.60 extra in CT anyway which pretty much offsets the NI.

Heres a link to some previous debate. http://forums.contractoruk.com/accou...ccountant.html

You have also misinterpreted the HMRC link. It does not say that paying over the figures it mentions will result in paye payments. Only that you have to operate a paye scheme if those numbers are exceeded which is a different thing entirely.

[Hughar]

Great, thanks for the advice!

I did try searching for this one (briefly!) but couldn't find it.

[Hughar]

If you have not taxable income from elsewhere then 7475 pa is probably ideal. This being the 'standard' personal allowance. Obviously your allowance may be different.

However don't forget to take off this whatever you have earned already in the tax year, potentially from other employers. (If you have salary of > 7475 already from elsewhere there is no point in paying yourself any salary at all - in terms of tax efficiency).

On 7475 you will pay a little NI (approx 85 pa). You could potentially try and ensure your annual income is 7072 - the secondary NI threshold then no NI is paid (check if you still get a years pension credit). In this case you will pay (7475-7072) * .2 = 80.60 extra in CT anyway which pretty much offsets the NI.

Heres a link to some previous debate. http://forums.contractoruk.com/accou...ccountant.html

You have also misinterpreted the HMRC link. It does not say that paying over the figures it mentions will result in paye payments. Only that you have to operate a paye scheme if those numbers are exceeded which is a different thing entirely.

Ok thanks. I have been paid alot this year anyhow PAYE from an Umbrella so there is no point paying any more than the £442, this year at least. Next year I will probably look at registering as an employer and doing the 7475.

Cheers!

[ASB]

Ok thanks. I have been paid alot this year anyhow PAYE from an Umbrella so there is no point paying any more than the £442, this year at least. Next year I will probably look at registering as an employer and doing the 7475.

Cheers!

Ok, so anything you pay yourself will attract Income tax - you have used up your allowances for the year already in effect. Whether you pay yourself anything or nothing doesn't really matter. It will balance through your monthly payroll or your tax return at the end of the year (only difference it make is when you pay/get a rebate). If you pay yourself no salary you will get a rebate from your tax return. Though in tax terms this is tax neutral. Basic rate tax is 20% as is CT (salary paid reduces profits and consequently CT).

The key thing is to ensure you do not pay NI. This is slightly complicated by the fact you are a director since NI for directors is usually done cumulatively pro rated (but doesn't have to be).

http://www.hmrc.gov.uk/nitables/ca44.pdf

What you will need to be cautious about is higher rate tax, this will kick in with total income - including dividends x 10/9 to include the notional credit - of approx 42k.

If you register with the IR you can do an on line tax return (if it's open for 2011/2 tax year). This will enable you to do "what if" type scenarios and see the impact of remuneration split between salary and dividends. Dont submit the return of course. If the IR one isn't open yet I suspect there are others out there.

Overall however it will make little or no difference. Paying dividends does not in effect avoid any tax. It avoids NI.

[lje]

(If you have salary of > 7475 already from elsewhere there is no point in paying yourself any salary at all - in terms of tax efficiency).

This is true. However, it is worth noting that it won't make much difference if you do pay yourself a salary of 7475 this year, even though you have already earnt money. The income tax will work out the same as tax on dividends anyway. Also, my understanding is that each employment is treated separately for National Insurance so it won't matter that you have been paying NI through the umbrella - you still won't have to pay it through your limited company until you hit the threshold there.

[Hughar]

Ok, so anything you pay yourself will attract Income tax - you have used up your allowances for the year already in effect. Whether you pay yourself anything or nothing doesn't really matter. It will balance through your monthly payroll or your tax return at the end of the year (only difference it make is when you pay/get a rebate). If you pay yourself no salary you will get a rebate from your tax return. Though in tax terms this is tax neutral. Basic rate tax is 20% as is CT (salary paid reduces profits and consequently CT).

The key thing is to ensure you do not pay NI. This is slightly complicated by the fact you are a director since NI for directors is usually done cumulatively pro rated (but doesn't have to be).

http://www.hmrc.gov.uk/nitables/ca44.pdf

What you will need to be cautious about is higher rate tax, this will kick in with total income - including dividends x 10/9 to include the notional credit - of approx 42k.

If you register with the IR you can do an on line tax return (if it's open for 2011/2 tax year). This will enable you to do "what if" type scenarios and see the impact of remuneration split between salary and dividends. Dont submit the return of course. If the IR one isn't open yet I suspect there are others out there.

Overall however it will make little or no difference. Paying dividends does not in effect avoid any tax. It avoids NI.

Great, this makes a lot of sense!

I will continue to pay myself £442 just because i don't want to have to wait 3 months to get any money. Also, I should be under the higher earnings limit this year as I had lots of time off.

Thanks again.

[JamJarST]

Great, this makes a lot of sense!

I will continue to pay myself £442 just because i don't want to have to wait 3 months to get any money. Also, I should be under the higher earnings limit this year as I had lots of time off.

Thanks again.

Why would you have to wait 3 months to get your money?

[Hughar]

Why would you have to wait 3 months to get your money?

Don't you have to wait 3 months to issue a dividend incase you issue an illegal dividend?