Reply to: (Hopefully) Quick question re tax rates on dividends

[Spoiler]

Say I want to take a dividend of £100k in this tax year. Is the whole lot (minus the £2k zero rated allowance) taxed at the Higher Rate of 32.5%?

Not knowing your personal circumstances - but you've already stated you have a significant warchest - I would ask if you really need to take £100k dividends this year ? If you don't need the cash, it may be more tax efficient to leave the money in the company only take what you need ?! Rinse and repeat next tax year...

[northernladuk]

Thanks, but my warchest is already sorted as I've saved enough over the years to cover a significant period out of work. (Although I do understand it'll be beneficial to build another one in the company account)

Just now, I'm mainly looking to educate myself as much as possible on the practicalities of it all, and explore different options just to ensure I understand the rules etc. I will of course run everything past my accountant before taking any action, but I like to at least have some comprehension before discussing these things with the professionals, and I find hypothetical situations help with my understanding :-)

Thanks to everyone for the advice so far - much appreciated

IMO you should be getting a FreeAgent accountant but if you are looking to do as much research as you can you might try getting yourself a trial account at the FreeaAgent website. It will give you an idea of it's functionality so you don't have to worry too much about the numbers. The software will take care of much of it for you. Just so you don't end up doing the work and then not needing it due to the FA offering.

[DrStrange]

The original question aside, this is the most valuable piece of information given (no disrespect intended to everyone else!). As a newbie to contracting you need to safeguard your income, by building your warchest ASAP you give yourself options in the event the contract finishes early, you dont get a second contract as quickly as you think or you decide to have some time off.

Once the above is sorted, and you've got an accountant you can ask about pensions, dividends, director loans etc

WLB>

Thanks, but my warchest is already sorted as I've saved enough over the years to cover a significant period out of work. (Although I do understand it'll be beneficial to build another one in the company account)

Just now, I'm mainly looking to educate myself as much as possible on the practicalities of it all, and explore different options just to ensure I understand the rules etc. I will of course run everything past my accountant before taking any action, but I like to at least have some comprehension before discussing these things with the professionals, and I find hypothetical situations help with my understanding :-)

Thanks to everyone for the advice so far - much appreciated

[WLB2018]

What you also need to bear in mind is that you need to grow a warchest as soon as possible. You need 3 to 6 months of money in your bank account that you can't touch in case your second gig doesn't come quickly or your first contract get's cancelled early. You are going to have no money coming in so your focus is accumulating money.

The original question aside, this is the most valuable piece of information given (no disrespect intended to everyone else!). As a newbie to contracting you need to safeguard your income, by building your warchest ASAP you give yourself options in the event the contract finishes early, you dont get a second contract as quickly as you think or you decide to have some time off.

Once the above is sorted, and you've got an accountant you can ask about pensions, dividends, director loans etc

WLB>

[DrStrange]

Lets say your first self assessment liability is for 2017/18 and the liability is £10k.

On 31st January 2019 you will pay the £10k liability (as you would expect) for 2017/18 plus a £5k payment on account towards the 2018/19 liability. You will then pay a further £5k payment on account towards 2018/19 on 31st July 2019 so that by the time that you submit the return for 2018/19 (due 31st January 2020), you will have paid £10k towards it.

If the amount due on the return for 2018/19 is then £12k, at 31st January 2020 you will pay £2k for 2018/19 (having paid £10k already), plus £6k on each of 31st January and 31st July 2020. If the amount due on next year's return is £8k, you will get a refund of £2k (as you will have overpaid) but will still make two payments on account (31st January and 31st July) of £4k each.



You are correct about NICs, you get a new allowance per employment (though it will be pro-rated if you become a director part-way through the tax year), so you could end up slightly better off by paying a small salary. When you appoint an accountant, they should be able to make a recommendation as to the best amount to pay etc.

Thanks, hadn't appreciated the payment in advance stuff. So much still to educate myself on...

[northernladuk]

The quick question turns out not to be a quick question. Whodathunkit.

[Alchemy Accountancy]

Thank you, I'm clearer on the tax bands but I'm unsure on the bit about payments on account - can you please elaborate a little?

Lets say your first self assessment liability is for 2017/18 and the liability is £10k.

On 31st January 2019 you will pay the £10k liability (as you would expect) for 2017/18 plus a £5k payment on account towards the 2018/19 liability. You will then pay a further £5k payment on account towards 2018/19 on 31st July 2019 so that by the time that you submit the return for 2018/19 (due 31st January 2020), you will have paid £10k towards it.

If the amount due on the return for 2018/19 is then £12k, at 31st January 2020 you will pay £2k for 2018/19 (having paid £10k already), plus £6k on each of 31st January and 31st July 2020. If the amount due on next year's return is £8k, you will get a refund of £2k (as you will have overpaid) but will still make two payments on account (31st January and 31st July) of £4k each.

Also, one reason I wasn't going to draw a salary was that I thought I'd have to pay PAYE, Ee NICs and Er NICs, but I've read something that NICs aren't cumulative in the same way taxes are. On that basis, could I draw a salary which doesn't exceed the NIC LEL of around £8k and only pay PAYE on that amount?

If so, I think I could effectively replace Corp Tax with PAYE on that amount, and save the 7.5% that I'd otherwise pay on the equivalent dividend?

You are correct about NICs, you get a new allowance per employment (though it will be pro-rated if you become a director part-way through the tax year), so you could end up slightly better off by paying a small salary. When you appoint an accountant, they should be able to make a recommendation as to the best amount to pay etc.

[TheCyclingProgrammer]

You’re right about the per employment NIC so yes a basic salary should work out marginally more tax efficient (the corporation tax and income tax almost cancel each other out) vs the 7.5% dividend tax, even allowing for the £2k tax free.

[DrStrange]

Note that on earnings at that level, you will also need to make payments on account (in addition to the actual tax) of 50% of the liability in each of January and July.

Hope this helps!
Craig

Thank you, I'm clearer on the tax bands but I'm unsure on the bit about payments on account - can you please elaborate a little?

Also, one reason I wasn't going to draw a salary was that I thought I'd have to pay PAYE, Ee NICs and Er NICs, but I've read something that NICs aren't cumulative in the same way taxes are. On that basis, could I draw a salary which doesn't exceed the NIC LEL of around £8k and only pay PAYE on that amount?

If so, I think I could effectively replace Corp Tax with PAYE on that amount, and save the 7.5% that I'd otherwise pay on the equivalent dividend?

Thanks again

P.s. to those who recommend asking accountants, please be assured I will do so nearer the time! I'm looking to educate myself a little better then though and who better to help clarify things than those with more experience than I ...

[Alchemy Accountancy]

Hi

I'll be starting my first contract in June and I'd like to double check the tax situation with regards to dividends.

By the time I start my contract, I'll already have earned around £30k from my permie job (due to a generous retention bonus). At it doesn't seem to make sense to draw a salary from my company in this tax year I thought I'd just wait and then take a dividend later. However, I'm unsure on what tax rates apply to that.

Say I want to take a dividend of £100k in this tax year. Is the whole lot (minus the £2k zero rated allowance) taxed at the Higher Rate of 32.5%?

Or it progressive like the PAYE system so the first £2k of the dividend is zero rated, the next £32,500 is taxed at 7.5%, then the remainder at 32.5%?

I've tried to research this myself but have read conflicting answers and I'm hoping that some kind soul on here can clarify.

Thanks!

You will taxed on your total income for the tax year via self-assessment, which in this case (assuming no other income form other sources) will be made up of your salary (£30k) and dividends (£100k) rather than being given a set of allowances for each income source.

Based on a total income of £130k in the tax year, your personal allowance will be withdrawn in full - but will depend on the tax code applied to your salary, so you will need to consider this as well when drawing dividends (where total income in the year exceeds £100k).

Salary is always taxed before dividends so the £30k salary will be taxed at basic rate (basic rate is 20% on salary), the remainder of the basic rate (less the dividend allowance of £2k, which comes out of the basic rate band in this case) will be used on dividends (basic rate is 7.5% on dividends) and the remainder of dividends taxed at higher rate (higher rate is 32.5% on dividends).

Assuming current year allowances, this will work as follows:

Salary:
30,000 x 20% = 6,000

Dividends
2,000 x 0% = 0
2,500 x 7.5% = 187.5
95,500 x 32.5% = 31,037.5

The total tax liability is then 6,000 + 187.50 + 31,037.50 = 37,225

Any tax that was deducted at source (via PAYE on the salary, which will depend on your tax code) will be deducted from this to leave the total amount to be paid via self-assessment.

Note that on earnings at that level, you will also need to make payments on account (in addition to the actual tax) of 50% of the liability in each of January and July.

Hope this helps!
Craig

[TheCyclingProgrammer]

I'm with NLUK on this one..

While it's easy to jump on here and questions like that from OP, it's kind of futile.

Just engage an accountant, it's not terribly expensive and getting a quick turn around on questions from a qualified professional is great.

What is going on here is effectively bar talk.. with missing context information etc..

There is only one answer to the question asked by OP. There is no other relevant context.

[DrStrange]

Correct.

Thanks for your time mate.

[password]

I'm with NLUK on this one..

While it's easy to jump on here and questions like that from OP, it's kind of futile.

Just engage an accountant, it's not terribly expensive and getting a quick turn around on questions from a qualified professional is great.

What is going on here is effectively bar talk.. with missing context information etc..

[northernladuk]

I’m not getting the “ask your accountant” replies to OP. They asked a very simple and generic question with a very simple answer!

But what else does he need to know that he isn't asking etc....

OP. What you also need to bear in mind is that you need to grow a warchest as soon as possible. You need 3 to 6 months of money in your bank account that you can't touch in case your second gig doesn't come quickly or your first contract get's cancelled early. You are going to have no money coming in so your focus is accumulating money.

[TheCyclingProgrammer]

Thanks for the replies.

I've not got an accountant yet but will obviously run everything past them once I'm fully up and running.

I think my mistake was not realising the different bands aren't actually different bands at all (i.e. the £34,500 "basic dividend" band is because the £11,850 personal allowance has already been factored in and so matches the "basic salary" band of £46,350).

So, going back to my example, am I right is saying that if I receive £31,500 from my permie job then I can take £2k dividends tax free, then another £12,850 @ 7.5%?

Thanks again

Correct.