Dividends or PAYE

**TheCyclingProgrammer** · 4 February 2014, 22:44

You don't need to take a salary or setup payroll but not taking one is not as tax efficient.

Dividends come out of your post tax profit. Salary is an expense and is tax deductible for corporation tax purposes. Assuming you have a full personal allowance, you can take almost of all of it as a basic salary free of income tax and reduce your corporation tax bill at the same time.

Now, NI thresholds mean there is a point at which the extra NI cost starts to cancel out the CT benefits. For 2013/14 the most tax efficient salary is £646 a month.

For 2014/15, the £2k employer NI allowance means it might be most tax efficient to take the full £10k personal allowance as salary but the details of this are yet to be finalised.

You may want to look at this thread which has a handy spreadsheet showing how various different salaries work out in terms of overall tax.

http://forums.contractoruk.com/accou...2014-15-a.html

**DirtyDog** · 4 February 2014, 22:52

No doubt someone will correct me if I'm wrong...

Don't you need to operate payroll to declare a P11D for your business expenses that have been reimbursed?

**Nixon Williams** · 4 February 2014, 23:03

Agree with much of the above except that the optimum salary for 2013/14 is £641 per month. This assumes by optimum your aim is to keep the salary below the amount that NIC (employees & employers) becomes payable.

If there is a need to file a P11d then the company will need to register for a PAYE scheme. However if your only expenses is mileage at the approved rate then no P11d entries are required.

**Wanderer** · 4 February 2014, 23:19

Originally posted by Cpo View Post

As the sole director do I need to pay myself a wage or is it acceptable to simply take a dividend 4 times a year?

As director, you can do as you see fit. There is no legal requirement to operate payroll except maybe if you are IR35 caught. You can also take dividends as often as you like. Many people take a dividend every time they raise an invoice.

Many people take a salary up to the tax free limit (£7,600/year). Since this amount is an allowable expense, it reduces the company profits by the same amount so you make a net gain of £1,520 by avoiding 20% corporation tax on the £7,600.

Have you already earned money this year from a PAYE job? If you have then it may be worth waiting till 6th April to start drawing a salary. Your accountant can advise based on your P45 from your last job.

**northernladuk** · 4 February 2014, 23:22

Why not take your dividends as early as you can to get them out of a virtually zero percent account and do something with it. Take the whole years allowance out right at the beginning of the tax year and slap it in your offset mortgage or something.

There is no problems with taking a dividend monthly if you really want, the arguments that it looks like a permie wage are rubbish, they are two completely different things. Nothing wrong with quarterly, just have to change your personal financial planning to not spend it too quickly.

Check to see if the accountant is raising your divi paperwork for you which is why he might be going for the less often approach.

Oh sorry forgot the usual. Make sure you work up a healthy warchest as your main priority. You are highly likely to spend time on the bench in the very near future so plan to cover that first before emptying the business profits and living the highlife.

**Zero Liability** · 4 February 2014, 23:36

Originally posted by TheCyclingProgrammer View Post

For 2014/15, the £2k employer NI allowance means it might be most tax efficient to take the full £10k personal allowance as salary but the details of this are yet to be finalised.

Will it basically be a straight £2k exemption? I thought it was contingent on the number of employees engaged, or did I misunderstand it?

**TheCyclingProgrammer** · 4 February 2014, 23:48

Originally posted by Nixon Williams View Post

Agree with much of the above except that the optimum salary for 2013/14 is £641 per month. This assumes by optimum your aim is to keep the salary below the amount that NIC (employees & employers) becomes payable..

No, by optimum I meant he maximum you can pay before NI starts to outweigh the corporation tax saving.

The £646 figure was given to me by my previous accountant. His blog post on the subject is here:

As a director, what should I pay myself in 2013/14? | 3CA Blog

There's not much in it, but the extra £60 a year costs £8.28 in NI according to that but saves an extra £12 in CT.

**TheCyclingProgrammer** · 4 February 2014, 23:50

Originally posted by Zero Liability View Post

Will it basically be a straight £2k exemption? I thought it was contingent on the number of employees engaged, or did I misunderstand it?

Nobody knows for certain as he final details haven't been announced but it should be a flat £2k allowance for ALL businesses.

https://www.gov.uk/government/upload...3_Final_v2.doc

I'm sure we will know by April.

**Contreras** · 5 February 2014, 00:40

Originally posted by TheCyclingProgrammer View Post

No, by optimum I meant he maximum you can pay before NI starts to outweigh the corporation tax saving.

The £646 figure was given to me by my previous accountant. His blog post on the subject is here:

As a director, what should I pay myself in 2013/14? | 3CA Blog

There's not much in it, but the extra £60 a year costs £8.28 in NI according to that but saves an extra £12 in CT.

In other words a saving of £4 per year. Whoopee!

I'll be doing this for 2013-14, as I did for last year too, but only because I pay salary annually (i.e. £7755). An extra 10 minutes for an additional bank transfer to HMRC at the same time as paying myself salary means technically it's not worth it but then there's the warm fuzzy feeling of paying no unnecessary tax.

Doing that monthly or quarterly wouldn't be worth the effort or risk (of screwing it up), even on point of principle.

Dividends or PAYE