Reply to: Basic Salary of £5,000?

[Maxamus]

A glimmer of understanding at last....



You're making money on expenses that you live on (plus the £5k a year). Interesting. So what do you do after two years...

1. Im on £10k minimum salary not £5k

2. Im a highways engineer so i do alot of travelling and site work which incurs alot of mileage. Printing A1 A0 drawings isnt cheap nor is a licence of AutoCAD and Bentley MXRoad.

3. Up in the North East contractors are not on the same rates as people down south.

Hence why after expenses and salary i am under the 40% tax bracket.

[malvolio]

A glimmer of understanding at last....

My company expenses keep me below the 40% tax bracket so does that mean all i pay is 19% on the company profits?

You're making money on expenses that you live on (plus the £5k a year). Interesting. So what do you do after two years...

[minstrel]

Someone explain this 10% tax credit to me.

Income from dividends is treated as if 10% has been paid already.

So, if you distribute £90 dividends, that is actually considered as a £100 gross dividend (£90 recieved plus a £10 tax credit)

You are taxed 10% (as basic rate tax payer) on dividends, but you have effectively already paid this because you only actually received the £90.

It's a bit like when banks deduct tax from interest payments before giving it to you.

You'll see the 10% credit on any dividend certificates you receive.

If you submit tax return on line you'll also see that dividends are entered net of the 10% credit (i.e. what you actually received) but they get the 10% added on in the calculations (and then generally deducted again later on).

I agree it's a bit confusing.

The key thing to remember is that the 10% is there - especially if you are looking to get to exactly the Higher Rate tax threshold. £27k of dividends received is actually £30k of income on your tax return.

[Maxamus]

whats this 10% tax credit on dividents?
All i know is that i pay 19% corp tax on the dividents i take out. Where does the 10% come into play?

My company expenses keep me below the 40% tax bracket so does that mean all i pay is 19% on the company profits?

Someone explain this 10% tax credit to me.

[Maxamus]

this is getting complicating.

[malvolio]

Not sure what looks contradictory to you?

Not contradictory, incomprehensible - unless I'm being dim (always a possibility!). If you take £5k salary and shove everything else into a pension fund, do you live on £96.15 a week? Or if you do take divis up to £38k, how does that align to "assuming you're IR35 caught"?

[Gonzo]

Am I right in thinking that If my salary is £10k then the rest can be taken in dividends without any further tax to pay (i.e 19% Corp Tax) providing I'm below the £38,300? (I think that it £38,300 this Tax Year?).

Yes. This government have made the calculations ludicrous but because your company has paid corporation tax on the revenue then the dividends are received with a 10% tax credit.

This 10% tax credit covers the tax that you as an individual have to pay (22%) below the higher rate threshold.

Be carfeul though because the £38,300 or whatever it is includes ALL your income including, but not limited to, salary, dividends, bank account interest.

Usual disclaimer: I am not an accountant. I am not FSA registered. I am not authorised to give financial advice etc etc.

[IR35 Avoider]

Say what? How do you equate those two statements then?

Not sure what looks contradictory to you?

[Cactus]

Yes the extra profit would be subject to tax buit we advise to at least take the minimum wage, which as £5.35 per hour work out at around £10,000

Alan

Am I right in thinking that If my salary is £10k then the rest can be taken in dividends without any further tax to pay (i.e 19% Corp Tax) providing I'm below the £38,300? (I think that it £38,300 this Tax Year?).

[IR35 Avoider]

And who pays the milkman then? You can't live on a pension fund - at least, not legally.

Mortgage effectively paid off, I can afford to take 10K a year in investment income without depleting capital, since 2003 wife has deigned to contribute 10K a year to household finances, and of course I'm still getting 5K a year in salary.

My annual spending budget is 15K plus whatever I spend on holidays, and I could cut the 15k to less than 12K if I got rid of my car, which I wouldn't really need if I wasn't working.

[expat]

My name is from the early days of IR35, I'm no longer "avoiding", unless you count working less and paying large pension contributions as avoiding.

Fair enough. I'm "expat" but I'm currently living in the UK.

[malvolio]

Yes, but remember that salary above the starting rate band (i.e. after roughly the first 7K) has a marginal tax burden of about 41%, if I remember correctly from the last time I calculated it.

I did a quick check on one of my spreadsheets and raising my salary from £5040 to 10K would increase my tax net burden from £2 to £1466. The spreadsheet assumes income not taken as salary is taken as pension, so corporation tax is not affected by the change. If it was, the difference would be £946 smaller. (In the spreadsheet, the contracted out rebate on NI contributions nullifies the corporation tax on the 5% not taken as salary or pension, reducing net tax burden to near zero.)

And who pays the milkman then? You can't live on a pension fund - at least, not legally.

[IR35 Avoider]

How interesting, given your nom de guerre. I don't mean to pry, but does that mean that you have other income not received via your own company, which you treat as not IR35-caught? so it would not be salary, then?

My name is from the early days of IR35, I'm no longer "avoiding", unless you count working less and paying large pension contributions as avoiding.

[IR35 Avoider]

Even if i lowered my salary by £5,000 wouldnt that leave £5,000 extra in the profit which would be taxed at 19% (Corp Tax)?

Yes, but remember that salary above the starting rate band (i.e. after roughly the first 7K) has a marginal tax burden of about 41%, if I remember correctly from the last time I calculated it.

I did a quick check on one of my spreadsheets and raising my salary from £5040 to 10K would increase my net tax burden from £2 to £1466. The spreadsheet assumes income not taken as salary is taken as pension, so corporation tax is not affected by the change. If it was, the difference would be £946 smaller. (In the spreadsheet, the contracted out rebate on NI contributions nullifies the corporation tax on the 5% not taken as salary or pension, reducing net tax burden to near zero.)

[expat]

.....
I've treated all contract income I've received via my own company as IR35-caught, so I'm not worried about an IR35 investigation.

How interesting, given your nom de guerre. I don't mean to pry, but does that mean that you have other income not received via your own company, which you treat as not IR35-caught? so it would not be salary, then?