Pension and Max dividend?

[ASB]

Not quite. If the pension contribution was paid direct to the pensions co. then yes but in that case you would lose out on your NI stamp. And you would only be deferring the tax until the pension is drawn, which is why people are suggesting to take dividends and only make pension contribution to avoid the high rate income tax band.

You really ought to seek advice from an accountant or tax specialist about this.

ASB, Not trying to pick holes, but:


More than made up for by the increased dividend, surely?

Also, do you mean £7488 ? (not 7475)

In any case I think £7605 delivers max take home + retained profit, rather than 8105 or 7488.

Also doesn't employers NI come out of profits before corporation tax?

Contreras,

You are not being picky, just precise.

So:

a/ Yes if you increased the dividend accordingly it would make up for the difference; but I simply coludn't be bothered to do another set of figures.

b/ Not sure if 7488 is the exact point at which NI kicks in, but I was just approximating to a round ish close point that I know is pretty close to where NI starts being paid.

c/ Again, not quite sure where the "exact best point" is. Probably as you say 7605.

My personal view is that paying your tax allowances as salary is generally pretty close to the best overall; and easy to do. For me I personally wouldn't normally expend the effort in trying to get the absolute best, since in order to do this I would have to consider all the other forms of income I had to get it to the penny and am too lazy. For some, of course, it is worth the while.

In effect I was just trying to show the OP the source of choices they had and the direction they would tend with a couple of points at which they would be fairly efficient tax wise.

[Contreras]

Could I take home £42,000 (£3500 per month) in dividends alone and then pay a salary of £30,000, where the salary goes 100% into a pension?

Not quite. If the pension contribution was paid direct to the pensions co. then yes but in that case you would lose out on your NI stamp. And you would only be deferring the tax until the pension is drawn, which is why people are suggesting to take dividends and only make pension contribution to avoid the high rate income tax band.

You really ought to seek advice from an accountant or tax specialist about this.

ASB, Not trying to pick holes, but:

You could pay yourself a little less (£7475) ... But in this case ... you'd have 630 less in your hand.

More than made up for by the increased dividend, surely?

Also, do you mean £7488 ? (not 7475)

In any case I think £7605 delivers max take home + retained profit, rather than 8105 or 7488.

Also doesn't employers NI come out of profits before corporation tax?

[ASB]

I understand that the new tax free income this year is £8105.
I understand that the band to the higher rate is an additional £34370, making a total of £42,475.

Could I take home £42,000 (£3500 per month) in dividends alone and then pay a salary of £30,000, where the salary goes 100% into a pension?

Apart from the usual CT on the Dividend, would there be any additional tax?

Following on from Clare:-

Personal side:-

1) 8105 salary
2) 30933 (34370 including the tax credit).

No further tax to pay, all in 20% band (unless you have other income of course). Is 39k enough for your daya to day living ??

Corporate

Bill, say 100,000
Less 30,000 company pension contribution
Less 8,105 salary

Gross profit 61895

CT @ 20% 12379

Net profit 49516

Dividends 30933

Retained Profit 18583


Note:

It must be a company pension contribution and should be kept under £50k. Also dependant upon your age consider the possible impacts of the lifetime cap.

The above figures don't take into account NI. This would be 61.56 employee, 85.15 employer. You could pay yourself a little less (£7475) and there would be no NI dues and you'd still get a years pension credit. But in this case your CT bill would go up by 8105 - 7475 = 630 * 20% = 126 so you'd only actually be £20 better off, and it would be in the company and you'd have 630 less in your hand.

I personally think that using the tax free salary, dividends to use up the lower rate band and sling the rest into a pension is a good strategy if you are an old buffer like me. Also mitigates the IR35 risk to some extent since the pension is still allowable even if you were eventually deemed IR35 fodder.

If you have a partner you can also consider allocating them some shares in order to use up his/her spare 20% band.

You don't pay CT on dividends. You pay income tax,but dividends comewith a tax credit of 10% which is considered as basic rate tax paid.

The company pays CT on its net taxable profit.

[northernladuk]

This is a basic situation and is explained in the newbie guides to the right. Worth a look as you may find information in there you are not aware of and didn't think to ask. Understanding how pay youself is a pretty low level requirement so the guides will help with other related topics.

[Clare@InTouch]

You have to keep in mind the dividend tax credit, so £42,000 in dividends is actually £46,667.

The £30,000 pension contribution will increase your basic rate tax band by £37,500. You will of course pay normal tax and NI on that £30,000 though, along with Employer's NI.

My advice would be to make the £30,000 payment from the company rather than personally, pay a lower salary, and then top up with dividends to the higher rate band.

Talk to an IFA, and your accountant.

[PMMan]

I understand that the new tax free income this year is £8105.
I understand that the band to the higher rate is an additional £34370, making a total of £42,475.

Could I take home £42,000 (£3500 per month) in dividends alone and then pay a salary of £30,000, where the salary goes 100% into a pension?

Apart from the usual CT on the Dividend, would there be any additional tax?