Reply to: Salary or Dividends for tax efficiency when on higher rate?

[Forbes Young]

Yes, I always pay myself expenses each time I receive payment for an invoice for the period covered so that's fine.

Actually another question on a similar subject: I still have quite a bit of my ISA allowance for this year as I've not been saving much while I was in permanent employment. Is there a benefit to me taking as much in dividends as I can before April 5th - paying the tax on it - and filling up my ISA, or leaving most of it in the company account and potentially avoid extra tax in the upcoming tax year?

I'm sure the short-term answer is leave it, as the tax due on the dividends will exceed any initial interest on the ISA, but in the long term I could have an extra £5-10k savings earning me tax-free interest. Thoughts?

Remember the few % interest on the ISA is the only thing that's tax-free. This amounts to not much at all! Savings on tax due on dividends is considerably more so concentrate on the timing of the dividend pay out.

[TheCyclingProgrammer]

Not worth it. It would probably take over 20 years to recoup the higher rate tax.

[Willapp]

Yes, I always pay myself expenses each time I receive payment for an invoice for the period covered so that's fine.

Actually another question on a similar subject: I still have quite a bit of my ISA allowance for this year as I've not been saving much while I was in permanent employment. Is there a benefit to me taking as much in dividends as I can before April 5th - paying the tax on it - and filling up my ISA, or leaving most of it in the company account and potentially avoid extra tax in the upcoming tax year?

I'm sure the short-term answer is leave it, as the tax due on the dividends will exceed any initial interest on the ISA, but in the long term I could have an extra £5-10k savings earning me tax-free interest. Thoughts?

[cwah]

thanks

[PerfectStorm]

what happens on 5/4/15?

The 6th is the first day of the new tax year: https://www.gov.uk/government/upload...-deadlines.pdf

[cwah]

Yes dividends is the most tax efficient - but also remember to take any expenses that need reimbursing to you from your company to you before 5/4/15 eg business car mileage and business travel expenses.

what happens on 5/4/15?

[Forbes Young]

Hi all,

Thanks for the advice. I'm certainly not trying to avoid paying any tax and I agree with the later comments regarding the Directors Loan idea, so I don't think that's the right choice in this situation. However it seems fairly unanimous that a dividend is better than salary so assuming my accountant is in agreement, that's what I'll do.

Cheers,
Will.

Yes dividends is the most tax efficient - but also remember to take any expenses that need reimbursing to you from your company to you before 5/4/15 eg business car mileage and business travel expenses.

[Willapp]

Hi all,

Thanks for the advice. I'm certainly not trying to avoid paying any tax and I agree with the later comments regarding the Directors Loan idea, so I don't think that's the right choice in this situation. However it seems fairly unanimous that a dividend is better than salary so assuming my accountant is in agreement, that's what I'll do.

Cheers,
Will.

[northernladuk]

I'd personally avoid the director loan ideas suggested above, unless you're confident that even with the additional dividends from that next year, you'd still likely fall below higher rate threshold.

Otherwise you're not saving any tax, just kicking it along the road whilst simultaneously creating extra complications and risk you get in a mess, spend the cash, then struggle to play catch up further down the line. Seen this happen many many times to people who think they're being smart.

My advice would be take the dividend (as that will be more tax efficient than salary). Yes this will push you into higher rates, but you may well find you get a tax rebate (or have only a very modest tax liability) due to the PAYE suffered on employment earlier in the year.

^ This...

Don't let the tax tail wag the dog IMO. The tax thresholds are not there to punish us or cause us stress and complications. Sometimes you go over and pay a bit more, sometimes you don't. We aren't talking life changing amounts here so do the best you can to stay under, if you don't, pay the bit extra and carry on but make note to not do it again.

[TheCyclingProgrammer]

I was going to suggest the directors loan approach too but Maslins makes a good point. If you can't get by on what's left of your basic rate band after paying off the loan, you'll only be in the same position again next year. But it might still be a useful option if you can make the £32k remaining work for the rest of the year.

At the higher rate, the main saving is in NIC as thhe effective tax rate on the higher rate dividend is 40% once you account for the corporation tax on your gross profit, e.g. £8k of net profit taken as a dividend would be after £2k CT and there will be a further £2k of income tax due.

[Maslins]

I'd personally avoid the director loan ideas suggested above, unless you're confident that even with the additional dividends from that next year, you'd still likely fall below higher rate threshold.

Otherwise you're not saving any tax, just kicking it along the road whilst simultaneously creating extra complications and risk you get in a mess, spend the cash, then struggle to play catch up further down the line. Seen this happen many many times to people who think they're being smart.

My advice would be take the dividend (as that will be more tax efficient than salary). Yes this will push you into higher rates, but you may well find you get a tax rebate (or have only a very modest tax liability) due to the PAYE suffered on employment earlier in the year.

[sal]

As others suggested taking the 3x3k as a director loan from YourCo and repaying them in April once you can draw dividends in the new financial year is your best bet. Just keep in mind that this will impact your finances in the next year as you would have eaten 9k out of the 41k odd threshold for the new year leaving you with 32k for the next 12 months potentially in need to take on loan again before the end of the next year.

[Contreras]

Consider taking a loan from YourCo, to be paid off in the new tax year but before your company year end. Will be >£10k so needs documented shareholder approval and you need to pay YourCo interest on the loan at HMRC official rate in order to prevent it being a BiK.

https://www.gov.uk/directors-loans/y...-company-money

Obviously, in addition extract all possible tax free expenses as you can.

[barrydidit]

Would you be able to utilise your directors loan account for the next few months, and then repay from dividends declared in April?

[Andrew@Wisteria]

Hi,

I realise the stock answer here is "ask your accountant" which I have, but he's a little slow responding and I wanted to get some other opinions anyway. Situation: I have just started contracting again having been in a perm role since the start of this tax year. To date I've already earned around £40k paid as salary.

I think the ideal situation would be that I don't take any money from my contract role until April when I can start taking the minimum salary and the rest as dividends as I used to do when contracting previously. However most of my savings are tied up and I'd get penalised for withdrawing so one way or another I'll need to take a few £k's from my business to cover bills etc for the next 3 months.

So the question is, do I get my accountant to set me up on payroll and start taking a salary straight away - and if so what salary? Or do I not take a salary and take it from dividends instead? I am a little unsure of which option is best from a tax perspective (both my personal liability and that of the business) or does it work out the same? Let's say I needed to take £3k a month for the next 3 months, how do the figures stack up?

Cheers,
Will.

In fairness to your accountant, January is quite a busy period, although anything more than 2 days is in my book is bordering unacceptable - a holding response in that period is at least better!

If you draw further salary, up to £41,865 you will get charged 20% tax and 12% NI (32%). After that 40% tax and 2% NI (42%). But the company receives a 20% deduction against the salary.

If you draw as dividends, up to £41,865 is tax free (net dividends would be £1,678.50 being £1865*0.9) After that you would pay 25% personal tax on any further dividends drawn (because you drop into the higher rate tax bracket. E.g. You would need to draw £12k in order to get your £9k (assuming the basic rate tax band has already been used up by your income for 2014/15).

The overall effect is that the higher rate dividends are charged at 32.5% tax after taking into account the tax credit, plus they have no NICs on them.