If you are definitely not IR35-affected then the optimum arrangement is:-
1. Pay your self a salary exactly equal to the personal allowance, £5035 this year, which equates to about £420 a month. You don't have to worry about the mimimum wage if you are a director without a contract of employment with your company. A contractor accountant did post somewhere that in his experience paying a low salary had no effect on the likelihood of being investigated. If you are investigated there is nothing they can do about the low salary - they will focus on IR35 and whether you are caught or not.
2. Pay dividends equal to 90% of the sum of the 10% and 22% bands, i.e. 90% of £2,150+£31,150 = £33,300, i.e a dividend of £29,970. The 10% reduction in what you can pay is for the tax credits which come with your dividends and are part of your taxable income. This calculation also assume you have no other taxable income (e.g. bank interest) otherwise you need to reduce the dividends slightly. Ensure that you can prove that each dividend was paid out of profits, and that you knew that at the time (for example by looking at the latest company accounts) and that you create a "minute" documenting the "meeting" at which you decided to declare the minute, and issue yourself a voucher for the tax credit. A common mistake is for contractors to wrongly assume their accountant is taking care of this, just because they take care of everything else. If you don't do this you run the risk that during some future year an investigation will cause 6x£30K = £150K worth of dividends get to reclassified as salary. I'd hate to think what the PAYE, penalties and interest bill on that would be.
3. Decide what to do with the excess money. Theoretically the optimum is to leave it in the company and invest it, and take out in a later years when for whatever reason you haven't earned enought to use up your basic rate band. This might mean after you decide to retire or work part-time.
All the above is based on you being 100% certain of not being IR35-caught. In practise I suspect one can never be that certain, or that Gordon won't do something nasty like introduce NI on dividends, so I would put the excess you don't want to pay in dividends as a company contribution into a pension scheme. The alternative of having savings in the company that you can't distribute (without paying higher-rate tax) is a hassle. It's going to take me until 2008 to extract profits I accumulated in the late 1990s. In fact I can only do it that soon because of the rule changes that mean I can use massive pension contributions to offset my IR35 liabilities from this year onwards.
1. Pay your self a salary exactly equal to the personal allowance, £5035 this year, which equates to about £420 a month. You don't have to worry about the mimimum wage if you are a director without a contract of employment with your company. A contractor accountant did post somewhere that in his experience paying a low salary had no effect on the likelihood of being investigated. If you are investigated there is nothing they can do about the low salary - they will focus on IR35 and whether you are caught or not.
2. Pay dividends equal to 90% of the sum of the 10% and 22% bands, i.e. 90% of £2,150+£31,150 = £33,300, i.e a dividend of £29,970. The 10% reduction in what you can pay is for the tax credits which come with your dividends and are part of your taxable income. This calculation also assume you have no other taxable income (e.g. bank interest) otherwise you need to reduce the dividends slightly. Ensure that you can prove that each dividend was paid out of profits, and that you knew that at the time (for example by looking at the latest company accounts) and that you create a "minute" documenting the "meeting" at which you decided to declare the minute, and issue yourself a voucher for the tax credit. A common mistake is for contractors to wrongly assume their accountant is taking care of this, just because they take care of everything else. If you don't do this you run the risk that during some future year an investigation will cause 6x£30K = £150K worth of dividends get to reclassified as salary. I'd hate to think what the PAYE, penalties and interest bill on that would be.
3. Decide what to do with the excess money. Theoretically the optimum is to leave it in the company and invest it, and take out in a later years when for whatever reason you haven't earned enought to use up your basic rate band. This might mean after you decide to retire or work part-time.
All the above is based on you being 100% certain of not being IR35-caught. In practise I suspect one can never be that certain, or that Gordon won't do something nasty like introduce NI on dividends, so I would put the excess you don't want to pay in dividends as a company contribution into a pension scheme. The alternative of having savings in the company that you can't distribute (without paying higher-rate tax) is a hassle. It's going to take me until 2008 to extract profits I accumulated in the late 1990s. In fact I can only do it that soon because of the rule changes that mean I can use massive pension contributions to offset my IR35 liabilities from this year onwards.
Oops. Last years NI rates.
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