Reply to: Today's BBC Moneybox programme (Personal and Small Business Tax)

[jamesbrown]

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Yes, there are so many different ways of cutting this. Depending on the salary/dividend mix, you can get down to <100 difference between regimes for a "typical" contractor scenario with low salary/high dividends. However, as you rightly say, we need to wait for the details. Eyes firmly fixed on the expenses and IR35 reviews, where the real news is likely to come.

[Underbase]

And as you can see there, we're still nearly £2k worse off. Whatever way you cut this, you're going to be worse off next year but you shouldn't feel it in your take home, just your company retained profit figures.

That was pretty much the conclusion that I came to, that the company will have less retained profits in the end, did you include the increase in tax free allowance?

[TheCyclingProgrammer]

This is all speculative as we don't know for sure how this works, but assuming the £5k was a standalone allowance outside of the basic income band, then my back of a fag packet calculations show it would only allow you to take more money home overall before hitting the higher rate of tax, but this doesn't mean very much as your bottom line would still be worse off by about £500 versus taking the same amount now and paying higher rate tax:

New rules, avoiding higher rate tax:
£11k salary
£5k tax free dividend
£32k dividend * 0.925 = £29.6k
TOTAL: £45.6k take home, £2.4k tax, retained profit used up: £37k

Old rules, avoiding higher rate tax:
£11k salary
£32k gross dividend * 0.9 = £28.8k
TOTAL: £39.8k take home, £0 tax, retained profit used up: £28.8k

Old rules, same take home as first example:
£11k salary
£32k dividend at basic rate * 0.9 = £28.8k
£8.59k gross dividend at higher rate * 0.9 * 0.75 = £5.8k approx
TOTAL: £45.6k take home, £1.93k tax approx., retained profit used up = £36.5k

So just because you haven't gone into the higher rate under the new rules, you still aren't any better off. However, this is also the scenario where you don't take dividends up to the higher rate threshold, keeping your take home similar to current levels:

New rules, similar take home to current rules:
£11k salary
£5k tax free dividend,
£25.7k dividend * 0.925 = £23.8k
TOTAL: £39.8k take home, £1.9k tax, retained profit used up: £30.7k

And as you can see there, we're still nearly £2k worse off. Whatever way you cut this, you're going to be worse off next year but you shouldn't feel it in your take home, just your company retained profit figures.

[dkennedy1001]

It's all relative

As regards dividends, if this is right (and I need to update my calculator now, I think) then we are less worse off than first appeared.

And the travel and subsistence is still in consultation...

Which calculator is this please, think I missed it?

Cheers

[PerfectStorm]

How many people will be past the 24 month rule when these expenses changes kick in anyway? Or as part of the deal will they get rid of that?

[NickNick]

The gist of it is that the 5K does not count towards your tax bands. So for those of us who take divvies up to the higher tax bracket, we're better off. Will attempt sums in the morning.

A bit like the money you can get from renting a room then?

[jamesbrown]

Likewise, anyone caught by IR35 on a decent rate (i.e. high rate from their deemed salary with profits remaining front the 5% allowance) are also going to be better off because they will pay a much lower marginal rate of tax on the dividends from the 5% allowance if they chose to withdraw them.

Martin
Contratax Ltd

Ha, yes! Good point. Many unintended consequences, as usual.

[ContrataxLtd]

Ironically, as a higher rate tax payer on PAYE, you'd be quite a lot better off in receiving dividends above the higher rate limit versus the current approach (up to about 22k of dividends, where the effect of the 5k wears off).

Likewise, anyone caught by IR35 on a decent rate (i.e. high rate from their deemed salary with profits remaining front the 5% allowance) are also going to be better off because they will pay a much lower marginal rate of tax on the dividends from the 5% allowance if they chose to withdraw them.

Martin
Contratax Ltd

[jamesbrown]

I couldn't make us better off (ignoring T&S) unless you were only going to take a 5K divvy - at a certain level (a bit into what is currently the higher tax bracket), the amount worse off became much smaller.

Ironically, as a higher rate tax payer on PAYE, you'd be quite a lot better off in receiving dividends above the higher rate limit versus the current approach (up to about 22k of dividends, where the effect of the 5k wears off).

[mudskipper]

It's all relative

As regards dividends, if this is right (and I need to update my calculator now, I think) then we are less worse off than first appeared.

And the travel and subsistence is still in consultation...

I couldn't make us better off (ignoring T&S) unless you were only going to take a 5K divvy - at a certain level (a bit into what is currently the higher tax bracket), the amount worse off became much smaller.

[TheFaQQer]

How do people think we will be better off? Are you forgetting that whatever we take out tax efficiently we will need to pay our T&S from? Or did I get that wrong?

I only have a monthly tube travel, but even that comes to £2040 a year

It's all relative

As regards dividends, if this is right (and I need to update my calculator now, I think) then we are less worse off than first appeared.

And the travel and subsistence is still in consultation...

[SandyD]

How do people think we will be better off? Are you forgetting that whatever we take out tax efficiently we will need to pay our T&S from? Or did I get that wrong?

I only have a monthly tube travel, but even that comes to £2040 a year

[jamesbrown]

The gist of it is that the 5K does not count towards your tax bands. So for those of us who take divvies up to the higher tax bracket, we're better off. Will attempt sums in the morning.

Not better off, at least for the typical contractor. You'd be better off in a PAYE scenario, as a higher rate tax payer, with 5k (or more, up to a point of around 22k) of dividend income.

[mudskipper]

The gist of it is that the 5K does not count towards your tax bands. So for those of us who take divvies up to the higher tax bracket, we're better off. Will attempt sums in the morning.

[jamesbrown]

Very interesting.. I find it a bit hard to believe we'll be almost better off by taking the notional amount out as described so will wait and see what my accountant says before I get the champagne out.

I note the "almost" , but we won't be better off under any circumstances. Marginally worse off in real terms when exploiting the full lower rate band next year, but with the tax planning possibility of paying zero additional tax up to the higher rate limit removed. In other words, you'd be 1.7k worse off in taking the optimal salary/dividend mix from this year and applying it next year. It just depends how you want to look at it. The tax planning possibility has been removed, but you can break even in real terms by taking a higher amount next year.