Summer Budget 2015 - Limited Company Directors pay

[con7ractor]

Your cost to company numbers are wrong. I suggest you use an accountant.

Can you clarify which numbers you think are incorrect?

The cost to company is what funds you would have to received into the company.

Thanks.

[WordIsBond]

Hi I've just worked out the following if a single director is earning the current 40% limit for 2015-16 taxation and the new method.

Your cost to company numbers are wrong. I suggest you use an accountant.

[con7ractor]

Earning 42385

Hi I've just worked out the following if a single director is earning the current 40% limit for 2015-16 taxation and the new method.

_________Earnings (NET)___Gross___Cost to Company_____To Pay HMRC
Salary____8064___________8064____8064_____________ _0
Dividend__30888.9_________34321__42901.25_________ __0

So for 42385 you would earn £38952.90 after all taxed payed, costing your company £50965.25

Now using the new figures for the following year and still earning the same 42835 to make comparison easier

______________Earnings (NET)____Gross_____Cost to Company____To Pay HMRC
Salary_________8064____________8064______8064_____ _________0
Tax Free Div____5000____________5000_______6250____________ __0
7.5 Div________27121.925_______29321_____36651.25_____ ______2199.075


So for 42385 you would earn £40185.925 after all taxed payed, costing your company £50965.25 using the new tax rules

Is this correct?

I have assumed that as they are scraping the tax credits, your dividend is no longer worth 1/10th more for counting towards your income, am I right in assuming this?

I'm sorry if i'm posting in the wrong place, but seemed relevant to the original question.

[Wijay@WISAccountancy]

With the new announcement of
a) change to dividend tax
b) change to the NIC Employment Allowance

(as detailed here Summer Budget 2015 denounced as 'bad' for contractors :: Contractor UK)

its started me wondering if low salary and large dividends are still the most tax efficient?

The dividend tax change now means that only £5k is taxed at 20% (corp tax) and the rest upto the upper tax bracket at 27.5% (20% CT + 7.5% new dividend tax).

This still seems to be lower than 32% (20% IT + 12% Employees NIC) if pay above NIC primary threshold (the Employers NIC being soaked up by the NIC Employment Allowance), but has added in an additional 7.5% on a proportion of dividends.

For me, continuing to pay via dividends works out at about an additional £4500/yr in tax


As there are 2 directors in my company, I was trying to think of some options. The NIC Employment Allowance is being removed for 1 man director companies, but would this apply if you have 2 directors?

Should it still be possible for us to claim this, then we could make use of this. Currently only one director is paid salary as the other director had a separate job. The other job had pay over the annual allowance, so if a salary was paid by our company, 20% IT would be paid, which at the time was equivalent to the 20% CT on dividends. As dividends were less paperwork than PAYE, we didn't explore this further.

However, I believe you have a separate NIC allowance per job, as opposed to IT allowances were salaries are combined and one allowance is applied. Therefore should we pay a company salary up to the primary threshold and not to take the sum of the two salaries above the basic rate band, then this would be taxed at 20% IT. This would then save some of the additional 7.5% from the additional dividend tax.

Is my understanding correct? are there any flaws? are there any other ways around these tax changes?

Thanks

Hi,
I think you need to look at company and personal tax separately to make it easier to understand. For 2 Director companies (if other director is your spouse) - my understanding is you can claim employment allowance but please await for more clarification on this space. I still think paying minimum wage and taking higher Div is worthwhile than worrying about employment allowance.

Dividend tax - yes this is the area worst affected but remmember from 2016/17 there no such thing as Gross Dividend and Net Dividend, both are same.

Pls see below calcs - if you keep dividends within the higher tax thresholds. Increase in Divs are offset by increase in personal allowance and change in Net/Gross Divs.

2015/16 2016/17 Increase
Gross Salary 10,600 11,000 400
Net Dividends 28,607 32,000 3,394
Gross Dividend 31,785 32,000
Total Gross 42,385 43,000
NI -305 -353 -48
Dividend Tax 0 -2,025 -2,025
NET IMPACT 1,721

Happy to answer any questions.

[stphnstevey]

With the new announcement of
a) change to dividend tax
b) change to the NIC Employment Allowance

(as detailed here Summer Budget 2015 denounced as 'bad' for contractors :: Contractor UK)

its started me wondering if low salary and large dividends are still the most tax efficient?

The dividend tax change now means that only £5k is taxed at 20% (corp tax) and the rest upto the upper tax bracket at 27.5% (20% CT + 7.5% new dividend tax).

This still seems to be lower than 32% (20% IT + 12% Employees NIC) if pay above NIC primary threshold (the Employers NIC being soaked up by the NIC Employment Allowance), but has added in an additional 7.5% on a proportion of dividends.

For me, continuing to pay via dividends works out at about an additional £4500/yr in tax


As there are 2 directors in my company, I was trying to think of some options. The NIC Employment Allowance is being removed for 1 man director companies, but would this apply if you have 2 directors?

Should it still be possible for us to claim this, then we could make use of this. Currently only one director is paid salary as the other director had a separate job. The other job had pay over the annual allowance, so if a salary was paid by our company, 20% IT would be paid, which at the time was equivalent to the 20% CT on dividends. As dividends were less paperwork than PAYE, we didn't explore this further.

However, I believe you have a separate NIC allowance per job, as opposed to IT allowances were salaries are combined and one allowance is applied. Therefore should we pay a company salary up to the primary threshold and not to take the sum of the two salaries above the basic rate band, then this would be taxed at 20% IT. This would then save some of the additional 7.5% from the additional dividend tax.

Is my understanding correct? are there any flaws? are there any other ways around these tax changes?

Thanks