Dividend related query

[ASB]

Would it not have made more sense to take this as a lump sum annual salary, or "bonus"?

Yes there would be 20% income tax but corporation tax is reduced equally, and salary is better than divvies from an IR35 perspective.

No NI due to being under £7072.

Fair point. Under the specific circumstances no NI required, the CT v income tax would make it overall equal.

[northernladuk]

Really NLUK, why do you feel the need to jump on every thread with a critical post?

I wonder....

I think you will find that salary vs. dividends is very relevant if your contract is ever deemed to be inside IR35. So if it can be done without incurring any extra tax then why not

Just taking divvies doesn't affect your IR35 status, but then I didn't say that did I.

I can't even begin to explain!

ps. don't bother answering. another neg will do fine, I seem to be collecting them from you.

I wonder why....

[Contreras]

WTF are you talking about? Salary better than divis for IR35?? Go away and read the guides again.

Really NLUK, why do you feel the need to jump on every thread with a critical post?

I think you will find that salary vs. dividends is very relevant if your contract is ever deemed to be inside IR35. So if it can be done without incurring any extra tax then why not.

Just taking divvies doesn't affect your IR35 status, but then I didn't say that did I.

ps. don't bother answering. another neg will do fine, I seem to be collecting them from you.

[northernladuk]

Would it not have made more sense to take this as a lump sum annual salary, or "bonus"?

Yes there would be 20% income tax but corporation tax is reduced equally, and salary is better than divvies from an IR35 perspective.

No NI due to being under £7072.

WTF are you talking about? Salary better than divis for IR35?? Go away and read the guides again.

[Contreras]

Now we found that I have got £6,968.57 reminder before I fell in to higher tax band so ,to me, it makes sense to take this as dividend to utilize this years tax band.

Would it not have made more sense to take this as a lump sum annual salary, or "bonus"?

Yes there would be 20% income tax but corporation tax is reduced equally, and salary is better than divvies from an IR35 perspective.

No NI due to being under £7072.

[ASB]

Thank you very much for the detailed explanation. It all makes sense now.

No worries, though it's just what Craig said with a detail of how the tax credits work. Though there was an error in this bit:-

"If you really want to push it to the wire just tell him you want a net dividend of 6271 and consequently 627 for your wife."

It should be 697 for your wife.

Sums just to be clear.

Declare next dividend of 6967.78

Your Net dividend (90% of total): 6271
Tax credit 10% = 1/9 of the net = 696.78
Your Gross taxable dividend (no further tax to pay unless total income > basic rate) = 6967.77

Mrs Net dividend (10% of total) = 696.78
Tax credit 10% = 1/9 of the net = 77.42
Mrs Gross taxable dividend (no further tax to pay unless total income > basic rate) = 774.20

In my view it always pays to get out enough to:-

Salary equivalent to personal allowances (or rather unused personal allowances) since there is no tax at all on this and it is an expense so relieves CT.

Dividend equivalent to the 20% band (in as much as it is not used by other income) since this has been subject to CT but doesn't attract any further personal liability.

Even if you are frugal and only live off fourpence it's better to get the money into your own personal hands and saved rather than letting it sit in the company. If it just sits in the company maybe a couple of years down the line you've amassed 100k and need it for the mortgage, getting this out in one hit then will attract additional personal tax.

If you don't use the benefit of the lower bands in any one year they are gone forever.

As for the warchest well true, you need something behind you for lean times, but that can be just as well in your own savings accounts as in the company's.

[N3wContractor]

Thank you ASB

£6,968.57 is the max gross dividend you can have. There is a 10% tax credit associated with dividends, this is treated as basic rate tax paid.

So, the max net dividend for you would be 6271.71.

Your accountant seems to be suggesting you declare dividends of 6800 - 6120 to you and 680 to your wife.

This equates to a gross taxable income of 6800 for you and 755.55 for your wife.

If you wanted every last penny then you could declare a dividend a little higher. Your objective seems to be to maximize your basic rate allowance, that's fine of course. But don't forget you have to include any odd little bits of income, credit income from bank/build soc, any other dividends etc.

If you really want to push it to the wire just tell him you want a net dividend of 6271 and consequently 627 for your wife.

Don't forget if your wife is a higher rate tax payer (including her dividend) then she will have a top up to pay.

In my experience it's easier just to get it "about right" and accept that there may be a little higher rate to pay, or possibly not used quite all of the lower rate. The only way your accountant can get it spot on is to know absolutely everything about all your sources of taxable income, is it really worth worrying about that for the accountants costs and the time spent collating it.

Thank you very much for the detailed explanation. It all makes sense now.

[ASB]

£6,968.57 is the max gross dividend you can have. There is a 10% tax credit associated with dividends, this is treated as basic rate tax paid.

So, the max net dividend for you would be 6271.71.

Your accountant seems to be suggesting you declare dividends of 6800 - 6120 to you and 680 to your wife.

This equates to a gross taxable income of 6800 for you and 755.55 for your wife.

If you wanted every last penny then you could declare a dividend a little higher. Your objective seems to be to maximize your basic rate allowance, that's fine of course. But don't forget you have to include any odd little bits of income, credit income from bank/build soc, any other dividends etc.

If you really want to push it to the wire just tell him you want a net dividend of 6271 and consequently 627 for your wife.

Don't forget if your wife is a higher rate tax payer (including her dividend) then she will have a top up to pay.

In my experience it's easier just to get it "about right" and accept that there may be a little higher rate to pay, or possibly not used quite all of the lower rate. The only way your accountant can get it spot on is to know absolutely everything about all your sources of taxable income, is it really worth worrying about that for the accountants costs and the time spent collating it.

[Craig@Clarity]

At a guess, he's probably quoted you the maximum net dividend amount as £6958.57, then rounded it down to £6800.

[northernladuk]

WHS and ask your accountat to explain it. It's what you pay him for.

[MrRobin]

There is a difference between GROSS dividend and NET dividend. Have you tried reading the first timer guides on this very site? See the links on the right hand side for more info.

Best Of luck

[N3wContractor]

Hello,

I have recently started contracting and before that I was in a permanent role. Because I was on higher tax rate during my permanent employment my accountant told me I'll be better off if I don't take any income in this tax year so I don't have to pay higher tax (made real sense to me).

Now we found that I have got £6,968.57 reminder before I fell in to higher tax band so ,to me, it makes sense to take this as dividend to utilize this years tax band. I have got my wife as 10% share holder in my company so my accountant mentioned that I can take £6120 and allocate £680 to my wife.

I can't understand these figures and how he has calculated it. If I sum dividend it totals to £6800 so 10% of it (£680) goes to my wife, that makes sense but what about reaming £168.57 (£6958.57 - £6800)??? I'm scratching my head for last few hours and thinking where does that money go because I can see in the system he has allocated £6958.57 in the dividend category. Does it go to any tax or anything like that??

Please help me to understand this.

Thanks.