Reply to: How much to pay onesself

[chopper]

Hi All

Assuming your tax affairs are 'normal'... (If you have other sources of income, e.g. a rental property, another job, whatever, then the figures are different. In 2018/19 do this:

Basic salary of £11,850. This is tax free, a small amount of employers and employee's NI contributions will be due. This is used to reduce YourCo's profits, and thus reduce the Corporation Tax bill.

Then a dividend of up to £33,150. The first £2,000 of this will be tax free. The rest is taxed at 7.5%. So about £2340 in tax to pay in your Self Assessment return. Stash this *plus 50% more* in a savings account, use it to pay your tax (in January 2020!) plus there will be a 'payment on account' due for 2019/20 due at the same time. Dividends are after corporation tax, so they do not reduce the taxable profit of the business.

This is why paying NI on salary can be better than the lower tax rate of the dividend - because of the corporation tax situation.


If you need more money than that, don't let the tax tail wag the expenditure dog. Take a bit more out, pay a bit more tax. But it gets stupid if you have kids and you take out more than £50,000.

But try not to take out less than £45,000, because yes you have to pay the tax, but the 7.5% tax is a damn sight better than having to pay a higher tax rate further down the line.

You can't keep liquidating your company every year. This is specifically against the rules, the taxman will see right through it. This only works if you liquidate and then don't set up again for at least two years after.

If your day rate allows it, whilst also building up a warchest, then pay some money from YourCo into a SIPP, e.g. one from Hargreaves Lansdown | ISAs, pensions, funds and shares . This is (currently) a pretty tax efficient way of transferring money out of YourCo. If you put £10,000 into a SIPP from YourCo, there is no personal tax implication (at least until it is time to withdraw your pension), but it will reduce your Corporation Tax by £1,900. So £10,000 in your pension for the price of £8,100.

In the early days of contracting though, building up a warchest is more important.

As for mortgages, either go to Halifax or Post Office, maybe Natwest (depends on your contract) as they are reasonably contractor friendly and will accept your day rate (something like day rate multiplied by 240 as your annual income) if you have a decent work history and a decent contract in place. If that makes you nervous then use a contractor specialist mortgage provider ("Contractor Mortgages Made Easy" to name one, but this is not a recommendation. I've always sorted my own out. Try LMGTFY )

As for accountants, you are doing yourself a disservice if you take any old random high street accountancy. Don't think you need one in your local town. Use a contractor specialist accountant. Try Gorilla Accounting (mine) but there are many.


But back to tax. Don't think about how you can pay zero tax. That is simply kicking a massive tax can down the road.

[t0bytoo]

The best options for 2018/19 are all laid out here:
https://jf-financial.co.uk/2018/01/0...dends-2018-19/

Very nice of them to sketch it out so clearly :-)

[pscont]

I can top up to my personal allowance of £11,850 by adding £3,426 but I'll pay 7.5% dividend tax and 12% NI on that extra £5,426 (2k dividend not included in taxable income).

I think you are wrong here. If you add this ~£3400 of dividend (over the £2000 divi tax free) you wont pay 7.5% divi tax due to you still being under £11850. You also wont pay 12% NI on it because it is divi.

Some one to correct me if I am wrong about the above.

[TheCyclingProgrammer]

The best options for 2018/19 are all laid out here:
https://jf-financial.co.uk/2018/01/0...dends-2018-19/

[Wazcov]

Based on the links provided maybe he’s gone with one of those accountants - “Cheaper Accountant” or “Cheap Accounting”

Not saying cheap isn’t good. It’s just not the first thing to look for.

Not at all, it's a high street accountancy, I think national. Their website certainly says "40 UK Chartered Accountancy firm"

[craigy1874]

Their prices are insanely low!

[MrButton]

Hi. It really sounds like you have very poor accountant.

Based on the links provided maybe he’s gone with one of those accountants - “Cheaper Accountant” or “Cheap Accounting”

Not saying cheap isn’t good. It’s just not the first thing to look for.

[amanwhoisquiet]

I got most of this info from a good few hour chat with my accountant

Hi. It really sounds like you have very poor accountant. I understood more about how I could pay myself through contracting by reading the introductory guides and brochures the accountant sent me before I even engaged them.

Getting a mortgage deal/in-principle is sometimes doable on your dayrate alone. Seriously, just google 'contractor mortgages', or use NLUK's search advice for this forum.

You should be able to draw dividends at will to get your personal income up to what you want/need it to be, up to the limit of your corp's profit and your appetite for the tax it attracts.

[rocketjet]

Efficient tax planning should come from your accountant as that’s what you pay them for.

[northernladyuk]

Hi northernlad

I appreciate the response, but you're gonna have to give me a bit more than "you're wrong".

You are new!

[malvolio]

And go to www.ipse.co.uk and get their Guide to Freelancing and read it

[SicsyBoy]

EDIT: Damn you NLUK's! Not only did I miss my chance to beat the "old man" by responding with the infamous catchphrase, but realise after posting this my comments are now pretty much redundant after you both responded with your own sage advice

Futhermore, If I want a mortgage, they aren't gonna give me a very good one for an income of just over £700 a month.

Not sure if this is of any use, and I'm sure there are plenty on here who know a lot more than myself about the ins-and-outs of lending but I've noticed something that is perhaps obvious in that different lenders seem to have different criteria.

EG based on recent conversations with lenders, Nationwide seem to base their decision on salary and dividends, whereas HSBC seem more concerned with the profit in the business and less concerned with dividends (which seems fairer on me!)

If I was in your position, I'd maybe have a chat with someone who understands the contractor mortgage market... there seem to be plenty of specialist brokers out there for example?

[northernladuk]

Hi northernlad

I appreciate the response, but you're gonna have to give me a bit more than "you're wrong". I got most of this info from a good few hour chat with my accountant, and referenced the accountancy and gov websites so can you give me a direction as to where I'm wrong?

Not really wrong, just uninformed. For example, the comments about mortgages. No problems getting mortgages for contractors but it's a whole topic to be explained. Just too much to feed you from your post.

Get an accountant and let them advise you what the best payment schedule is for you etc.

Don't forget the newbie guides on the right as well.

[Wazcov]

So many things wrong in your post and far to many topics to cover. Might seem like simple questions to you but it's covering a ton of stuff so we can't even begin to give you the knowledge you need.

Go get an accountant and go read the newbie guides to the right hand side. If you have any specific questions that your accountant cannot help with then try a search using the google method below.

To search the forums use <keyword> site:forums.contractoruk.com

Did I say get an accountant? Because you need an accountant.

Hi northernlad

I appreciate the response, but you're gonna have to give me a bit more than "you're wrong". I got most of this info from a good few hour chat with my accountant, and referenced the accountancy and gov websites so can you give me a direction as to where I'm wrong?

[northernladyuk]

Hi All,

I've fairly recently started contracting under an Ltd. So far I've only taken my tax-free dividend of £5k so that in this tax year I don't have to deal with working out a self-assessment based on what I'd earned from my full time employment + my own income.

However, as from 9th April (next tax year) I'll be paying myself a salary, and I'm now trying to work out how much to pay myself.

I've read a lot online about paying yourself £702 a month plus a one off £2000 dividend [1] [2] to be under the new rates and thresholds for the 2018/2019 tax year [3].

This makes completely tax free income of £8,424 a year. Plus the dividend to be £10,424. I can top up to my personal allowance of £11,850 by adding £3,426 but I'll pay 7.5% dividend tax and 12% NI on that extra £5,426 (2k dividend not included in taxable income).

However, given all the advice I read about online about paying oneself that much to avoid paying tax or NI where not needed, but I don't really get the point. If the money sits in the business account, I'm going to have to take it out somehow one day?? Unless I go through liquidating companies yearly, but that's not ideal. Futhermore, If I want a mortgage, they aren't gonna give me a very good one for an income of just over £700 a month.

So given that, what and how do people actually pay themselves?

Thanks in advance!

Wayne

[1] Salary and Dividends for 2018 / 2019
[2] How much to pay yourself from Limited Company 2018/19
[3] https://www.gov.uk/guidance/rates-an...s-2018-to-2019

You need conversations with two specialists:

- A specialist contractor accountant (hopefully you have one already)
- A contractor specialist mortgage broker (the old man deals with such things so he can recommend one).