Reply to: Tax on Dividends

[Bigbird]

Not sure if it's still the case but when I worked for the Revenue a "director only" PAYE scheme would be set up as an automatic annual scheme no matter how much the director was paid, and would only be changed to monthly/quarterly if the company requested.

IIRC this was because at the time (1986-1999) it would have been more usual practice for a director to be drawing varied amounts throughout the tax year and then getting his accountants to gross it up at the end of the year.

With the advent of Composite and MSC schemes that practice is possibly a lot less widespread so they may have changed it, but I can see no reason why a "director only" scheme wouldn't be made annual on request even if it wasn't set up that way.

[Nixon Williams]

If the average monthly payments are below £1500 then you can opt to pay quarterly.

The expenses would not change the PAYE/NIC on a salary, they may change the salary paid, but if the salary was fixed then the PAYE/NIC would be the same.

There is no need to have quarterly dividends, but that is your option.

Not sure where the 19.5% corporation tax saving is coming from as it is 19%. Corporation tax does not alter if they exceed £38K, you will be liable for extra personal tax if you are a higher rate tax payer but this is not a company liability.

I hope this makes things clearer!

Alan

[Novice Contractor]

You can only go on the annual payments basis if you take an annual payment, ie not monthly. The PAYE/NIC is paid monthly unless the average deductions are under £1500 per month, in which case the payments are paid quarterly.

Alan

Thanks Alan, my typical monthly deductions on £35 k are as follows;

Ers NIC - £373.25 Ees NIC - £320.76 PAYE - £527.86

Total Inland Revenue -£1,221.87

I haven't been given the option by my accountant to pay quarterly (Expenses can be anything up to £1,000 per month depending on the assignment, does this have an effect?)

I have written to my accountant requesting more proactive advice and including a tax efficiency table I have put together proposing from April 1st to drop my salary to £20k with quarterly dividends of £4,500, taken in advance of each quarter to provide £1,500 per month.

My accountant has replied saying that my figures and the assumptions they are based upon are 'spot on' and concurring that my proposal to make provision for 19.5% corporation tax on the dividends if I do not exceed £38k and 42% Corp and income tax if I exceed £38k with dividends is sound.

Disillusionment with my accountant is beginning to set in

[ASB]

You can only go on the annual payments basis if you take an annual payment, ie not monthly. The PAYE/NIC is paid monthly unless the average deductions are under £1500 per month, in which case the payments are paid quarterly.

Alan

I am sure that is the actual rule but HMRC do actually seem to show some flexibility. Paying small salary the actual quarterly payment was nil and reminders used to pop onto the doormat like clockwork.

I rang the accounts office, explained salary was only x p.a. and they were quite happy to put us on the annual basis - but did remind me that if anything occured which made a payment due it would still be my responsibilty to make the payment in the right quarter.

[Nixon Williams]

You can write to HMRC to tell them that you want to be put onto an annual payment basis and therefore their computer system should not flag you up as having missed any payments.

You can only go on the annual payments basis if you take an annual payment, ie not monthly. The PAYE/NIC is paid monthly unless the average deductions are under £1500 per month, in which case the payments are paid quarterly.

Alan

[THEPUMA]

OK so what I had in mind sounds inappropriate. But I would definitely still recommend that you reduce your salary from April. You can write to HMRC to tell them that you want to be put onto an annual payment basis and therefore their computer system should not flag you up as having missed any payments.

And if they do ask any questions, we will deal with them on your behalf.

[Novice Contractor]

Reduce your salary. A salary of £35K is costing you extra tax of roughly £7K ish. Change your accountant immediately. Preferably to me!

There may be a way of limiting the damage if you act before 05/04/07 even if you have paid the PAYE/NIC over already (which I guess you have) but it is not for the faint-hearted.

Email me at [email protected].

You are correct, I have paid my tax and NIC. I send off my transaction listings to my accountant monthly with the NIC cheque. I pay flat rate vat so send off that cheque quarterly. I have just got to the end of my first trading year as a LTD on 28th January and so have signed off my company accounts and have confirmed what my corporation tax liability is.

If I have been paying myself £35k and suddenly switch to a lower salary maximising my dividend potential, won't this draw attention? and what happens when I complete my annual tax return showing salary £5k and dividends £30k ish ?

This probably seems naive but my main aim over the next couple of years is to carry on contracting because I have had it up to my neck with senior managemnet roles and all of the line-management and reporting crap that comes with it.

I also want to get as much money into my pension plan as possible (my current pension provision is not great) so that I stand a snowball's chance in hell of retiring sometime between 60 and 65 (I'm 55 this summer).

Again naive but having had unwanted attention from the Tax man many years ago I would like to avoid more of the same (I was promoted to Director and my company paid the incorrect rate of tax for some time - unknown to me - when IRC found out I had to pay the back tax plus interest since when they send me a personal tax return to fill in every year)

[THEPUMA]

Reduce your salary. A salary of £35K is costing you extra tax of roughly £7K ish. Change your accountant immediately. Preferably to me!

There may be a way of limiting the damage if you act before 05/04/07 even if you have paid the PAYE/NIC over already (which I guess you have) but it is not for the faint-hearted.

Email me at [email protected].

[Novice Contractor]

Can I just make something clear here? There is never a situation where there is "no tax payable on dividends" as some of you seem to be implying.

Dividends are charged to tax at 10% on gross income up to the Higher Rate level, but as you get a 10% credit on them on your dividend voucher that element is effectively "pre-paid" for you and you personally wil not need to pay any further tax on them.

Over the HR limit they are taxed at 32.5% but the credit of 10% still applies, leaving a tax balance of 22.5% to be paid by you when you submit your tax return.

I've just been reading backwards through the thread, and now realise that
dividends plus salary = income. I was advised by my accountant to pay myself a liveable salary to avoid attracting attention from the IR. I haven't nee paying myself monthly dividends becasue I wanted to build up a bufer for when I am between assignments . I have taken two ad-hoc £5k dividends, now I am wondering if I am doing the right thing or should reduce my salary and pay myself monthly dividends? HELP!!

[Novice Contractor]

Tax on Dividend

This is interesting stuff. I am paying myself a salary of £35k per annum. In my first trading year (ending January 2007) I made a profit on which I paid 19% corporation tax. After corp' tax I have a retained profit (I have taken £10k dividends). My accountant tells me that the dividends are taxable at 22.5%, earlier responses would suggest that I do not have to pay tax on my dividends if my salary is £35k, which is correct. Also if I put a large amount into a pension fund (say £12k per annum) is there any tax downside?

[Novice Contractor]

Tax on Dividends

RE' "You need to add all the GROSS income including salary, dividends, interest and any benefits in kind that you may have such as cars, private health etc".
Is it not the case that profit is calculated after salary, expenses and pension contributions are deducted from turnover? Corporation tax is payable on profits @ 19%. Dividends do not incur employer's or employee's NIC contributions but do incur income tax at a fixed rate of 22.5%.

[VectraMan]

Can I just make something clear here? There is never a situation where there is "no tax payable on dividends" as some of you seem to be implying.

Dividends are charged to tax at 10% on gross income up to the Higher Rate level, but as you get a 10% credit on them on your dividend voucher that element is effectively "pre-paid" for you and you personally wil not need to pay any further tax on them.

Over the HR limit they are taxed at 32.5% but the credit of 10% still applies, leaving a tax balance of 22.5% to be paid by you when you submit your tax return.

Which just shows how ridiculously over-complicated our tax system is. They couldn't just say "zero tax" they have to say "10% tax with a 10% credit".

[Bigbird]

Can I just make something clear here? There is never a situation where there is "no tax payable on dividends" as some of you seem to be implying.

Dividends are charged to tax at 10% on gross income up to the Higher Rate level, but as you get a 10% credit on them on your dividend voucher that element is effectively "pre-paid" for you and you personally wil not need to pay any further tax on them.

Over the HR limit they are taxed at 32.5% but the credit of 10% still applies, leaving a tax balance of 22.5% to be paid by you when you submit your tax return.

[Hiram King Of Tyre]

Thanks...looks like stick to 38k then!

Out of interest, if you're in the 10% bracket ang take a company car, do you pay at 10% or does the BIK take you into the 22% bracket?

[VectraMan]

Just to clarify, dividends are paid out of post declared profits so the Co would have already paid 19%, then once your over the £38,xxx threashold you personally pay 22%? Below the threashold though, you pay no personal tax?

Correctomundo.