Drawing dividends over higher tax threshold - should I?

[Notascooby]

Bug,

The above is for when you decide to close down the company and stop contracting. If you're a year in, then this may not be for many moons to come.

As posted, it's wise to build up a sizeable warchest to tide you over tough times. then you need to think, is it better to pay 25% tax on extra divs to pay off a mortgage that's charging <2%?

I personally go over the high tax threshold every year, this adds complications but I can't income split due to having a wife that works and can't afford to live below the 40% tax threshold.

[psychocandy]

40% ???

OK. Maybe Im back thinking of permie land again....

[FRS]

I usually take what I need to comfortably live on. At the end of year I ensure my ISAs are filled (both cash and stocks/shares) and then remainder is kept in the company bank account. I usually drip feed approx 10% revenue into a SIPP as well. To be fair, most years I've paid some high rate tax.

If you need the money then take the tax hit, if you don't then leave it in the company ...

[Scrag Meister]

Also got to live a decent life, and quite often that takes a few quid, and you can't take it with you when you die, I usually end up paying some 25% personal div tax too.

[northernladuk]

Also got to live a decent life, and quite often that takes a few quid, and you can't take it with you when you die, I usually end up paying some 25% personal div tax too.

The Scrag has spoken!!!
WHS +1

It's not a hard cap, just one to consider when planning financially.

[Nixon Williams]

40% ???

Effectively it is 40%....

Corporation tax is payable at 20%, if the remaining profit is paid as a dividend AND you are already over the higher rate threshold, then you would pay 25% on the net dividend, 25% of the remaining 80% = 20%

Example:

Pre-Tax Profit = £1,000

Corp Tax @ 20% = £200

Net Dividend = £800

Extra tax on dividend = £200

So total tax paid = £400

Total left = £600

This of course ignores the problem for those lucky enough to exceed the Additional Rate threshold of £150K!

Alan

[northernladuk]

Effectively it is 40%....

Corporation tax is payable at 20%, if the remaining profit is paid as a dividend AND you are already over the higher rate threshold, then you would pay 25% on the net dividend, 25% of the remaining 80% = 20%

Example:

Pre-Tax Profit = £1,000

Corp Tax @ 20% = £200

Net Dividend = £800

Extra tax on dividend = £200

So total tax paid = £400

Total left = £600

This of course ignores the problem for those lucky enough to exceed the Additional Rate threshold of £150K!

Alan

Thanks for that Alan, never really thought divis like this but interesting. Maybe the term I should have put was '40% Tax???'

[Bug]

Thanks, all - I appreciate your responses.

I'm lucky enough to have just secured a role for the next 12 months, again at a reasonable daily rate, so, if I left the net profit in the company, I'm likely to end up with a decent war chest by the end of FY 12/13. As I see it, this war chest only becomes useful if I become ill, cannot get employment after FY12/13 or cannot work for any other reason. It seems there are three options: pension; war chest; or dividend - and, with a mortgage to pay off, I'm really tempted to take a lump sum, take the tax hit and pay off the mortgage this year.

I'll dwell further, and change my mind a hundred times no doubt! Thank you - further advice well received here!

[Joeman]

Thanks, all - I appreciate your responses.

I'm lucky enough to have just secured a role for the next 12 months, again at a reasonable daily rate, so, if I left the net profit in the company, I'm likely to end up with a decent war chest by the end of FY 12/13. As I see it, this war chest only becomes useful if I become ill, cannot get employment after FY12/13 or cannot work for any other reason. It seems there are three options: pension; war chest; or dividend - and, with a mortgage to pay off, I'm really tempted to take a lump sum, take the tax hit and pay off the mortgage this year.

I'll dwell further, and change my mind a hundred times no doubt! Thank you - further advice well received here!

can you Not wait a few months for the new tax year to pay off the mortgage??
Save the tax hit, and then take less next year as you won't need as much once the mortgage is paid off

[ASB]

can you Not wait a few months for the new tax year to pay off the mortgage??
Save the tax hit, and then take less next year as you won't need as much once the mortgage is paid off

This point is very good. I'll exemplify it. Assume you bill 108k next fy and have a mortgage of 100k and a tax code giving you 8k.

You pay a salary of 8k leaving 100k profit, paying 20k CT. You take 35 divs. This leaves 45k. If you also paid this you'd have 11.25k tax to pay but could pay about 33.75k off the mortgage (saving about 1000 in interest).

Now, for the year after that you don't work at all. You got hit by a bus or whatever. You could still pay yourself the 8k salary and take 35k in divs and still have a bit left. If you've used it all to pay the mortgage you have a bit of a tulip storm approaching.

You don't get hit by a bus, can still secure work etc. So in this second year you do take more and suffer the tax hit, but all you've lost is the interest (unless you are taking so much so as to reach the 50% band).

So, delaying taking it for a while only costs you a bit of interest on the mortgage (most of which you could probably defray by careful placement of the funds on deposit).

It does make sense to build up a decent warchest whilst you have the opportunity. It does depend on the attitude to debt, but effectively paying a large premium (tax) just to reduce the debt for the sake of it may not be the best use.

Edit: 45k retained not 55k