Take Higher Threshold Dividend Versus Director's Loan

[RTB]

I don't know if this has been covered elsewhere, but I couldn't find a similar post.

I was interested to hear from other contractors around their approach to managing dividends up to and past the 10% dividend threshold. I had always continued to take any more dividends past the first threshold, and simply pay the additional 30% tax on these as required. However speaking to other contractors in my office, a couple say that at the 10% tax threshold they take any additional money as a director's loan, and then repay this back to the company the next tax year with interest (to avoid the benefit in kind), which still works out cheaper than a 30% dividend tax.

Does anyone know how common this is , and whether this does work out any cheaper in the long run than paying the 30% dividend tax on higher earnings?

RTB

[Martin at NixonWilliams]

I don't know if this has been covered elsewhere, but I couldn't find a similar post.

I was interested to hear from other contractors around their approach to managing dividends up to and past the 10% dividend threshold. I had always continued to take any more dividends past the first threshold, and simply pay the additional 30% tax on these as required. However speaking to other contractors in my office, a couple say that at the 10% tax threshold they take any additional money as a director's loan, and then repay this back to the company the next tax year with interest (to avoid the benefit in kind), which still works out cheaper than a 30% dividend tax.

Does anyone know how common this is , and whether this does work out any cheaper in the long run than paying the 30% dividend tax on higher earnings?

RTB

Hi RTB,

Generally, most contractors will pay dividends up to the higher rate threshold (£42,475 for 2012/13). Any surplus income is usually kept aside to be taken when the company is closed (at a rate of 10% if eligible for entrepreneurs relief) or is saved for a period where you are out of contract.

A common method of getting more than the £42,475 without paying addional tax on dividends is by transaferring some of the shares in your company to your spouse. This is only advantageous if she has unutilised basic rate allowances of course.

Although paying a loan can be beneficial in some circumstances, it has to be repaid. I would therefore not consider this a way of extracting funds in the company. By paying the company interest and then the loan repayment itself, you are actually adding to the reserves of the company rather than extracting them!

Note that the tax on dividends is effectively 0% within the basic rate band (10% less 10% tax credit) or 22.5% if you are a higher rate tax payer (32.5% less 10% tax credit), there is no marginal or effective 30% rate.

It is not possible to say whether it is advantageous for you to suffer the higher rate tax on the dividends without knowing your exact circumstances, but I hope you find the above useful. Feel free to ask if you have any further questions.

Martin

[meanttobeworking]

What you describe is a useful technique for avoiding paying tax this tax year, although on the basis that post April 5th you just declare a dividend to cancel out the loan, all you're really doing is moving the problem into next tax year. Of course, if you're not expecting to make as much money next year, taking some time off, or expect to contract some debilitating disease, it's certainly worthwhile.

[SandyD]

Hi RTB,

Generally, most contractors will pay dividends up to the higher rate threshold (£42,475 for 2012/13). Any surplus income is usually kept aside to be taken when the company is closed (at a rate of 10% if eligible for entrepreneurs relief) or is saved for a period where you are out of contract.

A common method of getting more than the £42,475 without paying addional tax on dividends is by transaferring some of the shares in your company to your spouse. This is only advantageous if she has unutilised basic rate allowances of course.

Although paying a loan can be beneficial in some circumstances, it has to be repaid. I would therefore not consider this a way of extracting funds in the company. By paying the company interest and then the loan repayment itself, you are actually adding to the reserves of the company rather than extracting them!

Note that the tax on dividends is effectively 0% within the basic rate band (10% less 10% tax credit) or 22.5% if you are a higher rate tax payer (32.5% less 10% tax credit), there is no marginal or effective 30% rate.

It is not possible to say whether it is advantageous for you to suffer the higher rate tax on the dividends without knowing your exact circumstances, but I hope you find the above useful. Feel free to ask if you have any further questions.

Martin

Apologies to ask this question but: if I take £42,475 a year as divs i.e. £3539.58 per month, how much company tax do I pay and how much personal tax would I be paying?

[malvolio]

Apologies to ask this question but: if I take £42,475 a year as divs i.e. £3539.58 per month, how much company tax do I pay and how much personal tax would I be paying?

All that is owed, perhaps?

How the fsck would we know? The question has nothing to do with company tax at all. for personal tax we would need to know your personal allowances an dany other earned income you may have.

Or you could ask your accountant to work it out for you. You do have an accountant... Please tell us you have an accountant...

[Martin at NixonWilliams]

Apologies to ask this question but: if I take £42,475 a year as divs i.e. £3539.58 per month, how much company tax do I pay and how much personal tax would I be paying?

Hi SandyD,

Unfortunately, it is impossible to say! It depends on the profitability of your company and the mix of salary/dividends that makes up the £42,475.

Let us assume you earn precisely enough profit to pay a combination of salary and dividends up to £42,475, the salary being £7,488 (up to the NI threshold) and the remainder being in dividends. The tax would be as follows:

£46,848 Turnover
(£7,488) Salary
£39,360 Pre-tax profit
(£7,872) Corporation Tax
£31,488 Profit available for dividends

£31,488 in net dividends is £34,987 gross, this plus the salary of £7,488 takes you to £42,475. There is NO tax payable on the salary or the dividends. The only tax payable in this scenario is therefore the £7,872 in Corporation Tax.

It is ever as straightforward as this as there are many other things to consider, namely expenses, additonal turnover from flat rate scheme, spouses allowances if available, previous or other earnings, etc. etc.

I hope this helps.

Martin

[SandyD]

Hi SandyD,

Unfortunately, it is impossible to say! It depends on the profitability of your company and the mix of salary/dividends that makes up the £42,475.

Let us assume you earn precisely enough profit to pay a combination of salary and dividends up to £42,475, the salary being £7,488 (up to the NI threshold) and the remainder being in dividends. The tax would be as follows:

£46,848 Turnover
(£7,488) Salary
£39,360 Pre-tax profit
(£7,872) Corporation Tax
£31,488 Profit available for dividends

£31,488 in net dividends is £34,987 gross, this plus the salary of £7,488 takes you to £42,475. There is NO tax payable on the salary or the dividends. The only tax payable in this scenario is therefore the £7,872 in Corporation Tax.

It is ever as straightforward as this as there are many other things to consider, namely expenses, additonal turnover from flat rate scheme, spouses allowances if available, previous or other earnings, etc. etc.

I hope this helps.

Martin

Hi Martin, many thanks for the help, am a bit dyslexic when it comes to the accounting parts. So you are saying if I am taking the £7,488 salary (which I am) and then £34,987 divs, assuming no other income/ the usual individual allowance, I would be paying corporation tax of £7,872, but no personal tax on top?

Thanks for you patience

[Martin at NixonWilliams]

Hi Martin, many thanks for the help, am a bit dyslexic when it comes to the accounting parts. So you are saying if I am taking the £7,488 salary (which I am) and then £34,987 divs, assuming no other income/ the usual individual allowance, I would be paying corporation tax of £7,872, but no personal tax on top?

Thanks for you patience

Hi SandyD,

No problem at all

Assuming you have no other taxable income such as bank interest, property income etc. then yes, there would be no personal tax due!

Martin

[SandyD]

Hi SandyD,

No problem at all

Assuming you have no other taxable income such as bank interest, property income etc. then yes, there would be no personal tax due!

Martin

Great, thanks so much for your reply

[SandyD]

Oh apologies for the OP for hijacking the thread