Reply to: Basics please help a newbie

[Goodbuddha]

Wow... firstly thank you everyone for helping and thanks to the last answer I "think" the penny is starting to drop. Sorry for antagonising anyone. Enjoy the weekend

[WordIsBond]

Ok, you're a newbie, so I'll spell it out for you. There are several details you are getting wrong, but the really big thing you aren't factoring is employer and employee National Insurance both have to be paid on salaries.

You are being paid gross £82,500, and your salary is £8,424 (but we'll round to £8500 for simplicity). That's tax free. So far, we're ok, from there on your OP was wrong.

You next took out the £5K dividend. You can't do that yet. Dividends come out of profit and Corporation Tax must be paid first. You do not have £69K profit, you have £74K profit. Corporation tax (19%) will be £14060. Let's round it to £14K for simplicity. Your company (not you, YourCo) now has £60K in after tax profit. I hope you are with me.

I'm going to use 2018-2019 figures. I hope this works for you. You can have a personal allowance of £11,850 and a £2K dividend allowance, before any income tax. So that means you can have a total of £13,850 tax free, as long as at least £2K of it is dividends. You've already taken £8,500 in salary. So again rounding, let's say you can take another £5K tax free, in dividends. So you do that. You now have £13,500, tax free, and YourCo has £55K after tax profit.

You now take an additional £31.5K of dividend, and pay personal dividend tax of 7.5%. That's £2362.5. You have now received a total of £45K and have a dividend tax liability of around £2350, give or take a little. So after tax, you have £42,650 in your personal bank account. YourCo still has a reserve of £23.5K. (You could take that as a dividend and pay 32.5% but let's assume you don't, you keep it in reserve for now). YourCo has paid £14060, you've paid just overt £2K.

Now, for an alternative, you can save a load of Corporation Tax by paying yourself a salary of £45K. So let's see how that comes out.

YourCo:
It had £82.5K. It paid you £45K. That leaves £37.5K, right? Wrong. After the first £8K YourCo will pay 13.8%. So it's going to be a little over £5K, we'll round down to that. YourCo now has £32.5K. That's profit, so it is subject to Corporation Tax. Say goodbye to another £6.2K.

So if YourCo pays you a salary of £45K to save on Corporation Tax, it ends up with an after tax reserve of £26.5K. If you use a minimum salary and dividends to get to £45K, YourCo would have an after tax reserve of £23.5K. So it is better for your company to pay you salary, right?

But what about you? If you are paid £45K salary, you pay almost £4400 in National Insurance and £6630 in Income Tax. So a total of just over £11K, leaving you wtih £34K take home. That means you personally are more than £8K worse off, with a £45K salary, than with a minimal salary and dividends up to the £45K threshold.

So you can have your company be £3K worse off, pay dividends and pay more Corporation Tax.

Or you can have yourself be £8K worse off, pay salary and National Insurance and more Income Tax and less Corporation Tax.

This discussion does not deal with expenses, pension contributions, other benefits, etc.

[Goodbuddha]

The dividends tax is PERSONAL not COMPANY

I totally get that.
Company pays tax on profits @ 19%

The example mentioned no dividends tax,
Hence my first post about being taxed 19% on profits and then taxed again! 7.5% on dividends over 5k
------------------
your company earned £45k then:
£8.5k salary leaves £36.5k
Corporation Tax on £36.5k = £7.3k which leave £29.2k for dividends (this will be taxed @ 7.5% = *£2,200)
Your total take-home after tax £36,069,
so you are over *£2k better off than a permie on £45k.
-------------------
Apologies I'm probably finding it hard to explain myself.

[WTFH]

Thanks so much so far, just to use your example:



What about the 7.5% dividends tax?

The dividends tax is PERSONAL not COMPANY

Please read the earlier comments about separating the two!

[Goodbuddha]

Thanks so much so far, just to use your example:

Corporation Tax on £36.5k = £7.3k which leave £29.2k for dividends
.

What about the 7.5% dividends tax?

[pr1]

So I've paid 26.5% on a 44k salary???
19% on the profit 7.5% on the dividends

A basic rate taxpayer earning 45k only pays 20%

Seriously confused.

+12% employees NI (National Insurance contribution) aka stealth income tax

[WTFH]

That's where in confused, you say £2177 in tax..but as I pay corp tax before any dividends I've actually paid a lot more than that.

Yes, corporation tax comes out of the company. Personal tax is what you pay on your income. You (personally) pay £2177 out of the £45k.
Your company pays £14.8k on its profits. (Based on £82.5k turnover)

You need to split personal figures and company figures. You personally do not pay corporation tax on anything. You company pays it on profits.


If you want to change the figures totally, if your company earned £45k (not £82.5k) then:
£8.5k salary leaves £36.5k
Corporation Tax on £36.5k = £7.3k which leave £29.2k for dividends
Your total take-home after tax £36,069, so you are over £2k better off than a permie on £45k.

[northernladuk]

Ohh, trying to sort your accounts based on guesstimates and could be's on an anonymous forum. What could go wrong!

[malvolio]

That's where in confused, you say £2177 in tax..but as I pay corp tax before any dividends I've actually paid a lot more than that.

I have just got a new accountant as I found my current ones were charging me £220 per month for not very good service.

Thank you for the reply so so far

Fatal mistake #1. DO NOT confuse YouCo money and personal money. Ever.

So work out the company money including what you pay yourself as salary then work out your own taxes.

HTH. But get an accountant.

[l35kee]

That's where in confused, you say £2177 in tax..but as I pay corp tax before any dividends I've actually paid a lot more than that.

I have just got a new accountant as I found my current ones were charging me £220 per month for not very good service.

Thank you for the reply so so far

You haven't accounted for expenses. Money coming out of the business that not only is tax free, actually reduces the tax you pay.

[stek]

And you're also assuming a full year in contract......

[Goodbuddha]

The next bit is BOFP:
A company director going for £8,500 salary plus £36,500 dividends would pay £2,177 tax/NICs and take home £42,822

That's where in confused, you say £2177 in tax..but as I pay corp tax before any dividends I've actually paid a lot more than that.

I have just got a new accountant as I found my current ones were charging me £220 per month for not very good service.

Thank you for the reply so so far

[Eirikur]

Corporation tax is before dividend. What you missed out on your calculations are travel expenses (mileage, hotels, etc) which you can claim back from your ltd company and other expenses such as computer, printer, postage meals etc. If you go on the standard VAT rate (wich you should do if you expect a lot of expenses, else go flat VAT rate) you can also claim back VAT on all your expenses.
Also you can put money in a pension pot paid directly from your ltd company and no corporation tax has to be paid over that as well

On the other hand there are costs which you don't have as a permie such as accountant and insurances

Also read the first timers link on the right of this page ---->

[WTFH]

Ok, so I'm trying to get my head around how contracting is better for tax but I think I may have confused myself figures might not be infinitley accurate..

Contract is 375 per day
So after 11 months roughly 82500

If I take my tax free personal allowance
Min salary 8500
Dividend 5000

Leaves 69k
Corporation tax has to be paid on all that as thats a profit 19%

If I then take out 32k dividends to top up tax-free amount but keep below 45 to avoid higher tax I have to pay another 7.5% on that?

So I've paid 26.5% on a 44k salary???
19% on the profit 7.5% on the dividends

A basic rate taxpayer earning 45k only pays 20%

Seriously confused.

Have you an accountant at the minute?

A few things:
1. Tax free dividends are dropping to £2,000 next year
2. You're mixing up pre-tax and post-tax.
3. You're quoting %, not actual figures.

A person on £45k a year will pay £11,119 in tax/NICs from that and take home £33,881.

The next bit is BOFP:
A company director going for £8,500 salary plus £36,500 dividends would pay £2,177 tax/NICs and take home £42,822
The Ltd's profits are £82,500 - £8,500 = £74k, which would be £14.8k CT, so after paying that you would still have £22.7k left in the company.

In other words, you're £9k better off personally and you've got £22.7k left in the company, compared to someone on £45k a year.
...but if you just want to play a % game and get the figures wrong, then no, you're probably not better off

[l35kee]

No expert.. Musings below:

Corp tax is paid before any dividends. You also haven't accounted for any expenses whatsoever that will reduce your corp tax. i.e. your expenses may come out at like £25k over 12 months

So thats £25k + £8k before corp tax, then another £5k/£2k before dividend tax.

£44k salary takes home about £33k. You've made more than that before taking any taxable dividends.

Plus you've got additional retained funds in your company, for things like pensions. You've only limited how much you take out, the company has made more profit than that.

It varies, but atm I've taken home between 80-85% of my day rate. i.e. 15-20% tax on a much higher income than someone on a permie £44k a year. Permies taking home the same amount as me are paying over 40% tax compared to my 15-20%.