Reply to: National Insurance allowance

[Contreras]

OP has paid tax on 25k but only used half allowance. Therefore he could draw 5500 for remainder of year and have already paid correct tax on 25000+5500. Therefore no further tax liability. You seem to be ignoring the tax he has already paid. He did not get 11k of 25k tax free.

It will increase the liability.

Suspect you are right as to confusion. I suppose the simplest way of looking at it would be if OP has 11000 allowance and is half way through year he could take 5500 salary over remainder of year and pay no further tax. Any more and it is taxed on difference. Simples!

No further tax to pay directly. Having overpaid for the first half of the year, the increased liability is being paid out of the refund that would otherwise have been due.

There really are some ignorant morons on this site!

You're right. Thankfully easy to hide with a simple click. Simples!

[ASB]

Yes, I know that but seeing as pmasoft seems insistent that it is relevant that OP has "£5500 unused allowance" I wanted to know *his* answer.

WIB already gave the correct answer back on page 1 regarding salary.

I'd missed WIB's answer. But at least I now know my numbers weren't completely bonkers.

[TheCyclingProgrammer]

I wouldn't. Due to NI.

Yes, I know that but seeing as pmasoft seems insistent that it is relevant that OP has "£5500 unused allowance" I wanted to know *his* answer.

WIB already gave the correct answer back on page 1 regarding salary.

[ASB]

Fine, so you would you recommend it would be tax efficient for OP to take another £5.5k in salary for the remainder of the year and if so, why?

I wouldn't. Due to NI.

I think a better strategy would be to pay up to 672/month since that wouldn't attract NI. It would be tax neutral since the tax liability on the total 4032 would be offset by an identical reduction in Corp Tax. Profits would obviously drop by 4032.

There would be an advantage in this. This would reduce the amount able to be taken as a dividend by 4032, but it would also reduce the dividends actually paid by 4032, thus exposing less of them to the new dividend tax with a commensurate saving in total handed over to HMRC. By example:

Total Salary 25,000, div 15,000 = tax 2,800, div tax 750, ct 0.
Total Salary 29,000, div 11,000 = tax 3,600, div tax 450 ct -800. [The CT saving offsets the income tax but the dividend tax is reduced]

Of course there are assumptions in this that op is not a higher rate taxpayer. If it is the case that he is then the marginal tax rate on the 4032 would increase resulting in additional tax paid which exceeds the dividend tax paid. It would need a bit more thought and numbers. But by example.

Total Salary from all sources 45,000, div 15,000 = tax 7,200, div tax 3,250
Total Salary from all sources 49,000, div 11,000 = tax 8,800 div tax 1,950, ct -800 [The CT saving half offset the income tax, but this become broadly neutral since there is less dividend exposed to the topup and dividend tax, basically neutral]

Of course I am not certain I have got the number right since it was a random calculator at an accountants I used rather than doing the sums manually. Obviously for most folks paying a large salary is inefficient due to the NI; but it may be appropriate for the OP to pay some salary to reduce their exposure to the dividend tax.

[TheCyclingProgrammer]

Yes Yes Yes Yes.

OP has paid tax on 25k but only used half allowance. Therefore he could draw 5500 for remainder of year and have already paid correct tax on 25000+5500. Therefore no further tax liability.

Fine, so you would you recommend it would be tax efficient for OP to take another £5.5k in salary for the remainder of the year and if so, why?

[ASB]

If you are right, and he still has unused allowance, the tax liability under both scenarios will be the same. If you are wrong, paying that extra £5.5K in salary is going to result in a higher tax liability than if he hadn't paid it.

In many respects there is an apple and an orange being compared.

What pmasoft is actually saying (correctly) is that there is no additional tax to pay under paye. It's true.

He is not saying it does not increase the overall liability. This is an inference that people are erroneously drawing.

The actual situation, is that the liability which does accrue to the 5.5k has already been paid via paye.

What paying the additional 5.5k which gives rise to no paye liability will do is cause the REFUND that would otherwise have been triggered (because the average paid per month is decreasing) to be reduced/not triggered.

[WordIsBond]

And so will I.

So if HMRC cooperates we can get a housecleaning started around here.

Some of us have been here too long anyway.

[Lance]

Actually it isn't. In as much as the tax on that 5,500 has already, in effect been paid.

And it is. In as much as the total liability for the year increases.

Agreed. I'm keeping my explanation simple.

[ASB]

No no no no.
OP has already had £25k gross.
You cannot be saying that he still has £5.5k to take with no tax that is just plain wrong.

Actually it isn't. In as much as the tax on that 5,500 has already, in effect been paid.

And it is. In as much as the total liability for the year increases.

[Lance]

That's what I'm saying right now. But if you can do the maths and prove it out that you are right, and that the SATR tax liability is the same whether he pays himself £5.5K salary or not because he really does have unused allowance left, I'll admit I was wrong, and "like" every comment you've made on this thread, and then retire from CUK for as long as you say.

And so will I.

[WordIsBond]

@pmasoft
My comment about financial services added nothing to the discussion. Shouldn't have made it, sorry.

You can win this discussion. I'll tell you how -- run the numbers and show your results.

Use these inputs. Assume OP had exactly 25K salary as a permie over 6 months. He then contracts the remaining six months.

Please calculate his final tax liability (as determined on his SATR) if he pays himself no salary at all in his six months of contracting. Then, calculate his final tax liability if he pays himself £5.5K in salary in those six months (half of the annual allowance).

If you are right, and he still has unused allowance, the tax liability under both scenarios will be the same. If you are wrong, paying that extra £5.5K in salary is going to result in a higher tax liability than if he hadn't paid it.

I haven't calculated the numbers out to get exact amounts, but I will tell you in advance that paying himself £5.5K in salary is going to result in a final income tax liability which is £1100 higher. I understand what you are trying to say, but if he follows your advice he will be (in terms of income tax, ignoring dividend tax, CT, and other considerations) £1100 poorer than if he follows the advice of everyone else here. There's a sense in which you are getting at something that is true, but it is totally irrelevant to what the OP needs to know to be tax efficient.

That's what I'm saying right now. But if you can do the maths and prove it out that you are right, and that the SATR tax liability is the same whether he pays himself £5.5K salary or not because he really does have unused allowance left, I'll admit I was wrong, and "like" every comment you've made on this thread, and then retire from CUK for as long as you say.

[ASB]

Suspect you are right as to confusion. I suppose the simplest way of looking at it would be if OP has 11000 allowance and is half way through year he could take 5500 salary over remainder of year and pay no further tax. Any more and it is taxed on difference. Simples!

Yes and No. The first payment will generate a refund (subject to regulatory limits).

I will use different figures to make it easier for me.

HM Revenue & Customs: PAYE-Session Ended

24k paid upto month 6. Free pay = 5,500, tax due = 4,198

1k paid in month 7. Free pay = 6,422, total tax due to date = 3,715, refund = 482.60

1k paid in month 8. Free pay = 7,339, tax due = 3,732, less 3,715 paid, tax due = 17

If in month 7-12 payroll was run and his pay was zero then month 7 would trigger a refund of 682.60, 8 a refund of 183.40 and so in. Total to be refunded by month 12 (with zero additional income in that period) would be £1,600

[SueEllen]

pmasoft, you're wrong. Others have explained why.

Monthly PAYE deductions are just employers attempting to collect your tax evenly over the year, done on the basis that you'll continue earning at a similar rate all year.

Do you ask people's CUK username before you decide to take them on as a client?

[pmasoft]

No no no no.
OP has already had £25k gross.
You cannot be saying that he still has £5.5k to take with no tax that is just plain wrong.

Yes Yes Yes Yes.

OP has paid tax on 25k but only used half allowance. Therefore he could draw 5500 for remainder of year and have already paid correct tax on 25000+5500. Therefore no further tax liability.
You seem to be ignoring the tax he has already paid. He did not get 11k of 25k tax free.

[Lance]

Suspect you are right as to confusion. I suppose the simplest way of looking at it would be if OP has 11000 allowance and is half way through year he could take 5500 salary over remainder of year and pay no further tax. Any more and it is taxed on difference. Simples!

No no no no.
OP has already had £25k gross.
You cannot be saying that he still has £5.5k to take with no tax that is just plain wrong.