A dumb question about income tax bands

[Jessica@WhiteFieldTax]

TLDR - sorry

Who knew real maths could be useful in accounting!

Absolutely - I took a tribunal case once on a pubs tax affairs, and we needed to evidence wastage when pipes were cleaned. Oh my old friend PI, how I missed thee for 20 years

[psychocandy]

Sadly, it is more complicated than it used to be.

For 2012/13:

Income tax is payable on income over £8,105

Employee's NIC is payable on income over £7,605

Employer's NIC is payable on income over £7,488

For 2013/14 the figures are:

Income tax is payable on income over £9,440

Employee's NIC is payable on income over £7,748

Employer's NIC is payable on income over £7,696

Think I get it. OK so by not paying £8105 I'm basically losing £617 worth of tax free allowance yet? (So I'm paying 20% in effect by taking it as divi instead = £122.

But the reason for doing this is because if I did take it the employers and employee NI on this extra £617 would be more than the amount saved in tax? correct?

[Master]

Think I get it. OK so by not paying £8105 I'm basically losing £617 worth of tax free allowance yet? (So I'm paying 20% in effect by taking it as divi instead = £122.

But the reason for doing this is because if I did take it the employers and employee NI on this extra £617 would be more than the amount saved in tax? correct?

Yes, you are right. Also you save yourself the admin of making monthly payments of a few quid of NIC to Hector.

[Contreras]

Yes, you are right. Also you save yourself the admin of making quarterly payments of a few quid of NIC to Hector.

FTFY.

You need to file Nil returns instead though, to let HMRC know you haven't simply forgotten to pay, so overall admin about the same.

It would actually save a few pence* to pay right up to the Primary Threshold (£7748, 2013/14) even though this incurs NI, but the risk is you mess up or forget to pay and HMRC land you with a penalty.

* about a fiver a year, so only worth it on point of principle.

[Nixon Williams]

Think I get it. OK so by not paying £8105 I'm basically losing £617 worth of tax free allowance yet? (So I'm paying 20% in effect by taking it as divi instead = £122.

But the reason for doing this is because if I did take it the employers and employee NI on this extra £617 would be more than the amount saved in tax? correct?

You only 'lose' the tax allowance on the salary, however, assuming that you have other forms of income, probably dividends, then the unused tax allowance is taken account of here.

This assumes that your gross income does not exceed £100,000 as the tax allowance is gradually withdrawn above this level.

Alan

[psychocandy]

You only 'lose' the tax allowance on the salary, however, assuming that you have other forms of income, probably dividends, then the unused tax allowance is taken account of here.

This assumes that your gross income does not exceed £100,000 as the tax allowance is gradually withdrawn above this level.

Alan

??? But CT is paid by the company and then tax credit applied to personal tax, isn't it?

If you're say £500 short of using up your full allowance via salary you don't then get to pay no tax on the first £500 of any dividends do you? (because its already been taxed via company as CT).

[d000hg]

It raises by £500 how much you can take as dividends before they attract higher tax.

[psychocandy]

It raises by £500 how much you can take as dividends before they attract higher tax.

Ah yes. But it doesnt save you any more tax if you're below the 40%....

[Nixon Williams]

??? But CT is paid by the company and then tax credit applied to personal tax, isn't it?

If you're say £500 short of using up your full allowance via salary you don't then get to pay no tax on the first £500 of any dividends do you? (because its already been taxed via company as CT).

Dividends are paid with a 10% tax credit - so a £900 dividend has a £100 tax credit making a total gross dividend of £1000.

To answer your point, effectively you could take £500 in a gross dividend, which would be £450 net, ie the actual amount declared and paid from the company account.

Our website has a dividend calculator that will allow you to put in your salary, dividends taken so far etc, and advise how much you can take before hitting the higher rate tax bracket, this is also available as an app, but I am not allowed to put a link on here.

[d000hg]

Our website has a dividend calculator that will allow you to put in your salary, dividends taken so far etc, and advise how much you can take before hitting the higher rate tax bracket, this is also available as an app, but I am not allowed to put a link on here.

With all the discussion through this thread, your calculator would become really valuable if it let you enter charitable giving as well and took that into account.