Reply to: Dividends and low salary - whats the deal these days?

[Noiro]

Nothings changed, the context for the advice is in the first paragraph that you didn’t quote.

but inside IR35 contracts do make income planning far harder than it used to be.

it’s very simple never use dividend waivers to avoid paying a shareholder (that way lies a world of pain and a very easy case for HMRC to win).

Ah - gotcha cheers. I misread that as two separate points. Yes easy and safe when you keep it simple and always pay equal dividends. No share classes, no waivers.

Total pain when mixing umbrella income in the mix for sure.

[eek]

Has anything changed for this eek? I'd appreciate knowing why you posted that - I split my company 50/50 with the mrs, equal shares and both directors, and it works well for us. Curious if there's something I missed...

Nothings changed, the context for the advice is in the first paragraph that you didn’t quote.

but inside IR35 contracts do make income planning far harder than it used to be.

it’s very simple never use dividend waivers to avoid paying a shareholder (that way lies a world of pain and a very easy case for HMRC to win).

[Noiro]

If you are planning to pay dividends to your wife use different share classes or preferably don't bother and issue a bumper amount in April.

Has anything changed for this eek? I'd appreciate knowing why you posted that - I split my company 50/50 with the mrs, equal shares and both directors, and it works well for us. Curious if there's something I missed...

[psychocandy]

If we were having this conversation in April, then there's an article on the site with some advice about thresholds:
For 2021, what’s the best dividend-salary mix for limited company directors? (contractoruk.com)
They recommended either £8788 or £9500 for 2021/2022. The key point is that this amount is high enough to make it a qualifying year (in terms of eligibility for state pension) but low enough that it's covered by the personal allowance (i.e. no income tax).

However, that assumes that all your income comes from the limited company. If you've been on PAYE for the past 7 months (either inside IR35 or permie) then you'll probably have earned more than that already, in which case you could take a salary of zero and split any other money (after company expenses) between dividends and pension.

Bear in mind that if you've registered your new limited company recently (Oct/Nov) then your company's tax year will be out of sync with your personal tax year (Apr-Apr). So, it might make sense to leave money in the company until next April. Realistically, this is where you need an accountant's advice. Personally, I use Excel to check the figures for my SATR, so I'd make a couple of copies of that worksheet and play with different scenarios.

Also bear in mind that dividends can only be paid out of profit. So, if you have a short contract but you still pay accountants fees and insurance for the whole year, make sure that the profit will cover your dividends. The simplest option would be to wait until the end of your company's year, when you know exactly how much is available, but it depends how soon/frequently you need to take money out.

Last year, some contractors were able to put themselves on furlough, i.e. the government would repay (some of) the salary costs to the limited company. However, this was based on salary, not dividends. So, there's an argument that your salary should be high enough to cover your bills (e.g. rent/mortgage), even if that's less tax efficient.

cheers hobnob

[psychocandy]

This post is hidden because its author is on your ignore list. Show Post

Sorry NLUK - not interested in what you're saying because you can guarantee its just you trying to run this forum again.....

[northernladuk]

If we were having this conversation in April, then there's an article on the site with some advice about thresholds:
For 2021, what’s the best dividend-salary mix for limited company directors? (contractoruk.com)

Thank you for pointing that out. Shame PC can't put the same level of effort in to finding out how he gets paid for his job.

[hobnob]

If we were having this conversation in April, then there's an article on the site with some advice about thresholds:
For 2021, what’s the best dividend-salary mix for limited company directors? (contractoruk.com)
They recommended either £8788 or £9500 for 2021/2022. The key point is that this amount is high enough to make it a qualifying year (in terms of eligibility for state pension) but low enough that it's covered by the personal allowance (i.e. no income tax).

However, that assumes that all your income comes from the limited company. If you've been on PAYE for the past 7 months (either inside IR35 or permie) then you'll probably have earned more than that already, in which case you could take a salary of zero and split any other money (after company expenses) between dividends and pension.

Bear in mind that if you've registered your new limited company recently (Oct/Nov) then your company's tax year will be out of sync with your personal tax year (Apr-Apr). So, it might make sense to leave money in the company until next April. Realistically, this is where you need an accountant's advice. Personally, I use Excel to check the figures for my SATR, so I'd make a couple of copies of that worksheet and play with different scenarios.

Also bear in mind that dividends can only be paid out of profit. So, if you have a short contract but you still pay accountants fees and insurance for the whole year, make sure that the profit will cover your dividends. The simplest option would be to wait until the end of your company's year, when you know exactly how much is available, but it depends how soon/frequently you need to take money out.

Last year, some contractors were able to put themselves on furlough, i.e. the government would repay (some of) the salary costs to the limited company. However, this was based on salary, not dividends. So, there's an argument that your salary should be high enough to cover your bills (e.g. rent/mortgage), even if that's less tax efficient.

[BR14]

*Mod snip* - < not constructive to the specific thread question >

oh, really?
delusions of competence.

[eek]

Given the fact that PC has probably hit the £50,000 tax band this year can I just point out do not do the dividend waivers suggestions in the CUK News section - that would is a whole world of entertaining (for HMRC) pain for you.

If you are planning to pay dividends to your wife use different share classes or preferably don't bother and issue a bumper amount in April.

[northernladuk]

*Mod snip* - < not constructive to the specific thread question >

And PC asking questions about the absolute fundamentals of contracting is constructive with his history?

PC - Ask your accountant. You've got issues with perm salary in the year so what is standard isn't going to fit you anyway as the pay is going to be different. So why not get your question from the horses mouth while finding out the answer to the second question of already earned income before you spam us with it?

[psychocandy]

If I'm wrong, I'm sure someone will come and correct my figures, but these should be about right:

Salary £9568. This brings you up to the primary threshold for NI, meaning no NI required to pay on either employee or employer side.
Salary covered by £12570 tax free allowance on income

Dividends:

First 2k @ 0% tax
(£12570 - £9568) = £3002 @ 0% (Remaining tax free allowance)
Next £37500 @ 7.5%
Next £99,730 @ 37.5%
Rest @ 38.1%

EDIT: Going up by 1.25% on all 3 of the dividend bands in 2022. So 8.75, 38.75, 39.35 respectively.

thanks Bodger - similar to what I'm used to. Apart from the extra dividend tax :-(

And CT is changing as well isnt it?

[northernladuk]

*Mod snip* - < not constructive to the specific thread question >

[Bodger]

If I'm wrong, I'm sure someone will come and correct my figures, but these should be about right:

Salary £9568. This brings you up to the primary threshold for NI, meaning no NI required to pay on either employee or employer side.
Salary covered by £12570 tax free allowance on income

Dividends:

First 2k @ 0% tax
(£12570 - £9568) = £3002 @ 0% (Remaining tax free allowance)
Next £37500 @ 7.5%
Next £99,730 @ 37.5%
Rest @ 38.1%

EDIT: Going up by 1.25% on all 3 of the dividend bands in 2022. So 8.75, 38.75, 39.35 respectively.

[psychocandy]

Low salary and dividends still the way to go. There is a 7.5% tax on dividends going up next year due to the "Covid tax".

First £2000 in dividends exempt from tax I believe.

ah I see in 2016 an extra tax was added even for basic rate payers..... Like I said before there was no more tax to pay....

Guess its changed a bit and not for the better....

[zonkkk]

Low salary and dividends still the way to go. There is a 7.5% tax on dividends going up next year due to the "Covid tax".

First £2000 in dividends exempt from tax I believe.