Maximum Allowance

[timhaughton]

Could someone just clear this simple point up for me.

I pay myself minimum wage (whatever that currently is) and take the rest of my earnings in dividends.

Given that I earn minimum wage, what is the maximum I can take out per year to avoid higher rate tax?

Cheers,

Tim

[VectraMan]

Higher rate tax limit - amount you pay yourself.

£23K off the top of my head without checking the facts.

[timhaughton]

Think I've realised what a daft question it was. This tax thing is still a mystery to me.

The limit for upper rate tax is £33,300. So with a nominal salary of £5k, that means I can take £28300 in dividends.

Unless I'm missing something - which is entirely possible.

Tim

[VectraMan]

I should point out that I paid my first dividend ever on Wednesday , so I might be talking nonsense. My accountant will only say "things get a little complicated" when you pass the upper rate limit.

[timhaughton]

Now I've confused myself even further.

I seem to be reading that the £33,300 is the upper limit for taxable earnings, which doesn't cover the basic allowance. So what I'm reading seems to suggest that I can take £5035 salary, plus £33,300 in dividends, totalling £38,335 a year.

I'm also confused as to whether there's actually a married couple allowance or not. And if there is, whether it's an allowance for the whole couple, or whether it's for each person.

Tim

[VectraMan]

Yes - the limits don't include the allowance, so effectively the upper rate limit is £38K ish.

But you should ask an accountant to be sure.

BTW minimum wage is about £9500 per year, not the allowance, although I think as a director you're exempt from the minimum wage rules so you can pay just the allowance as salary. Personally I think that's taking the piss.

[timhaughton]

BTW minimum wage is about £9500 per year, not the allowance, although I think as a director you're exempt from the minimum wage rules so you can pay just the allowance as salary. Personally I think that's taking the piss.

The chancellor takes the piss out of *us* every year in his budget, I have no problem in returning the compliment.


Tim

[malvolio]

True, but that's the trade-off. There is a theory that if you want to get investigated for IR35, use the "low salary/high regular dividend" approach - legal but suspicious.

However, a director is exempt from minimum salary, so your salary would be the 0% tax threshold, somewhere around £4800 pa. The rest is taken as dividends, which are tax free to you up to the point where your gross income goes over the 40% band start point of around £37k. After that it gets complex.

Ever thought of asking an accountant? Have a word with SJD...

[VectraMan]

I wonder if paying yourself £0 as salary and just getting dividends is less suspiscious, as at least you can claim there's a legitimate reason for doing so (i.e. helping the business). Paying your allowance as salary is pretty blatantly a tax avoidance measure as there's no other reason you'd choose that number.

Probably not.

[malvolio]

But the counter argument is that taking all your profit as dividend could be seen as not helping the busines and that the business is a purely artificial construct to avoid paying tax at all.

And the accountant's answer is that £0 pa is less tax efficient,since you are not taking advantage of the zero-rate and 10% tax allowance bands, which are cheaper than corporation tax.