Reply to: Budget\Calculate monthly for PAYE & Corporation Tax (spreadsheet)

[xoggoth]

Surely something can be created to estimate PAYE & Corporation tax for the year?

Certainly can, I used to do all my stuff in Excel, but deleted 'em as retired and closed company a while back.

Probably easiest to just keep three basic sheets - receipts, valid business expenses and valid personal expenses and then use available online calculators on the net figure to do the tax stuff. PAYE is most complex and HMRC does a good free PAYE calculator:

https://www.gov.uk/basic-paye-tools

[jmo21]

Ok. So what's the parameters in regards to when you should pay the higher rate tax. Based on this advice if I go back to my day rate where I could potentially earn 100-120k a year you're saying I should split this over years in the event in out of work?

My mindset is I'd like to earn the maximum I can, pay the relevant tax and I save my own money in the event of "lean" times. But sounds like this may not be wise. I need to find a happy medium between maximising earnings and sound tax advice utilising my limited company.

Appreciate all the replies to this post 👍

This is the bit where we cannot advise you, as it all depends on you.

Me?

7 years contracting, every single year I've been right around the upper threshold paying only a few hundred quid personal tax some years (this year I think it hit a grand).

My warchest is all in the company. I don't need it right now.

Of course, I could buy a £25,000 motor in cash like a contractor I worked with recently, but I don't need it.

[TheFaQQer]

Ok. So what's the parameters in regards to when you should pay the higher rate tax. Based on this advice if I go back to my day rate where I could potentially earn 100-120k a year you're saying I should split this over years in the event in out of work?

My mindset is I'd like to earn the maximum I can, pay the relevant tax and I save my own money in the event of "lean" times. But sounds like this may not be wise. I need to find a happy medium between maximising earnings and sound tax advice utilising my limited company.

Appreciate all the replies to this post 👍

You should take out as much money as you need. If this is below the higher rate threshold, then you should take out up to that threshold but not exceeding it. If this is more than the higher rate threshold, then you should take more out and pay the tax on it.

There is nothing wrong with doing what you are doing, though - you run your life and your business as you see fit. If you want to keep the money yourself, then you should do that, but as you say there is a chance that this won't be as tax efficient as you could be.

You pays your money and you takes your choice.

[aoxomoxoa]

My mindset is I'd like to earn the maximum I can, pay the relevant tax and I save my own money in the event of "lean" times. But sounds like this may not be wise. I need to find a happy medium between maximising earnings and sound tax advice utilising my limited company.

It depends on the timescales you're considering. The advice given above will mean you're more likely to maximise your disposable income from your Ltd Co over a number of years by managing your tax exposure in any single year - based on the likely scenario that your billable income will fluctuate from one year to another.

Ultimately it's up to you to decide what you need/want to take as income to live comfortably, and if that means paying higher rate tax then that's clearly your choice. Most posters here seem not to operate that way.

[northernladuk]

Ok. So what's the parameters in regards to when you should pay the higher rate tax. Based on this advice if I go back to my day rate where I could potentially earn 100-120k a year you're saying I should split this over years in the event in out of work?

My mindset is I'd like to earn the maximum I can, pay the relevant tax and I save my own money in the event of "lean" times. But sounds like this may not be wise. I need to find a happy medium between maximising earnings and sound tax advice utilising my limited company.

Appreciate all the replies to this post 👍

Your accountant should be able to provide you with some more accurate examples.

[robz8701]

Ok. So what's the parameters in regards to when you should pay the higher rate tax. Based on this advice if I go back to my day rate where I could potentially earn 100-120k a year you're saying I should split this over years in the event in out of work?

My mindset is I'd like to earn the maximum I can, pay the relevant tax and I save my own money in the event of "lean" times. But sounds like this may not be wise. I need to find a happy medium between maximising earnings and sound tax advice utilising my limited company.

Appreciate all the replies to this post 👍

[TheFaQQer]

I really don't get this statement of "only withdraw what you need" and leave the rest in the business account so it can be withdrawn at a later time? What's the point? I may as well go back to permanent and earn more money? Naive possibly but if I'm earning more surely I take higher dividends and pay the tax required?

That's certainly one school of thought.

So, this year you invoice £90k and take the lot out (let's say it's roughly £55k). You pay the additional tax on the income over £43k (or whatever the exact figure is at the moment). You get hit with the bill, company has no reserves, but you take the money. Life is good.

Next year, you can't find a contract for a while. You invoice £50k. 20% tax 20% VAT, so you're left with £32k. You take that out, pay no tax and the company still has no reserves.

So rather than taking £55k and £32k and getting a tax bill in year one and none in year two, you could have taken £43k in each year and had a much smaller bill.

If you were to close your company down, you may well take the ER route, which means you pay 10% tax on the money you take out. Which is significantly better than taking it all out year by year and paying income tax if you don't need the money.

Your accountant should be able to provide you with some more accurate examples.

[northernladuk]

Or various mechanisms to close your company down and pay less tax on a element of the money than you would through dividends in then high rate.

[DannyF1966]

The part I find confusing is why am I advised to take dividends so that I don't pay higher tax? If I'm not going to utilise the limited company to maximise my income contracting I don't see the point?

What if you have a good year followed by a lean year? If you have a good year and withdraw as much as you can from your company you'll end up paying higher rate tax on some of it. If you then have a lean year you'll have less to withdraw and won't reach the higher rate limit. But if you leave money in the business you can use it to pay yourself dividends in the lean year up to the limit.

So instead of year 1 pay yourself £60K, year 2 pay yourself £30K, why not pay yourself a steady 40K each year, not go over the limit, and still have 10K left over for year 3?

[aoxomoxoa]

Useful stuff in this thread as I've been trying to make sure I understand it as well. I do have freeagent, but I like knowing the workings behind it.

I've only just switched to ltd from brolly, so not using payroll for the last months this year and dividend only, so my simplified assumption for calculation right now is:

Receive invoice amount + VAT
Ignore VAT
Pay myself expenses
Deduct 20% CT
Remainder is max dividend I can pay (of which 25% needs to be kept aside for SA)

Have I got this right?

Don't forget other company expenses before you calculate CT. For example salary to yourself, accountancy fees, PI insurance, computing kit, and contribution to your pension.

When you pay dividend from company you need to gross it up to determine what gets declared on your SA.

[robz8701]

Yes apologies as I'm getting confused with PAYE & self assessment ie tax I have to pay personally on dividends withdrawn.

The part I find confusing is why am I advised to take dividends so that I don't pay higher tax? If I'm not going to utilise the limited company to maximise my income contracting I don't see the point?

I really don't get this statement of "only withdraw what you need" and leave the rest in the business account so it can be withdrawn at a later time? What's the point? I may as well go back to permanent and earn more money? Naive possibly but if I'm earning more surely I take higher dividends and pay the tax required?

Problem with a lot of this is nobody seems to want to work based on scenarios or plan for a month by month budget taking into account tax provision over the whole year.

Surely I'm not the only IT contractor who thinks like this?

[rob s]

Useful stuff in this thread as I've been trying to make sure I understand it as well. I do have freeagent, but I like knowing the workings behind it.

I've only just switched to ltd from brolly, so not using payroll for the last months this year and dividend only, so my simplified assumption for calculation right now is:

Receive invoice amount + VAT
Ignore VAT
Pay myself expenses
Deduct 20% CT
Remainder is max dividend I can pay (of which 25% needs to be kept aside for SA)

Have I got this right?

[aoxomoxoa]

That took about 4 minutes to work out. I don't understand why you seem to think you have a massive PAYE to pay.

I think the OP meant salary, but called it PAYE.

[JRCT]

Does make me laugh the arrogance and rudeness of some people who reply.

As stated I came into an issue the last financial year with my newly assigned accountant, no issues before that.

If I knew how to understand all this I'd do it myself and wouldn't have an accountant. I was just asking honest questions FFS

Just be good to have estimates based on working every available week in the year. Appreciate it may not pan out that way but hopefully you can understand this from my viewpoint.

I have taken on board the advice and will ensure I have conversations with my accountant.

I'm sure with all the right info I can create something which allows me to budget showing what dividends I can take and what provisions need to be made for the relevant taxes applicable

You haven't mentioned salary at all in your calculations. Are you paying yourself a tax free salary?


Based on your numbers, a very rough calculation (assuming you work 260 days per year):

Income (incl. VAT) - £85,800
VAT to pay - £12,441
Expenses to pay - £9,456 (your figs, including £150 a month for a mobile (?) but not the PAYE that you state)
Corp Tax to pay - £12,781
Money left to pay salary and divs - £51k

Salary - £10k tax free
Divs - £32k (effectively) tax free

£9k to leave in the ltd account or pay divs at the higher tax rate.

That took about 4 minutes to work out. I don't understand why you seem to think you have a massive PAYE to pay.

[robz8701]

Does make me laugh the arrogance and rudeness of some people who reply.

As stated I came into an issue the last financial year with my newly assigned accountant, no issues before that.

If I knew how to understand all this I'd do it myself and wouldn't have an accountant. I was just asking honest questions FFS

Just be good to have estimates based on working every available week in the year. Appreciate it may not pan out that way but hopefully you can understand this from my viewpoint.

I have taken on board the advice and will ensure I have conversations with my accountant.

I'm sure with all the right info I can create something which allows me to budget showing what dividends I can take and what provisions need to be made for the relevant taxes applicable