Reply to: Maximum Allowance

[ASB]

If you're right, my accountant's PAYE software is wrong, my spreadsheet calculations are wrong, and this online calculator is wrong. (The online calculator shows no NI due on a yearly salary of £5035 and £0.24 of NI due on £5036.)

Oops. Last years NI rates.

[pedant]

They've stuffed it a (tiny) bit though. Since 5035 (annual limit) is not a multiple of 97 (weekly limit). You now pay less NI if paid weeky than if paid monthly.

7488 PA = 624 PM = Total NI of 588.36
7488 PA = 144 PW = Total NI of 587.60

[boredsenseless]

Obviously the optimum way to show that the dividend is paid out of profits is to have retained profits from previous years that are equal or greater than the dividend you intend to pay.

Obviously it takes a while to get to this position though

[IR35 Avoider]

Not quite. You'll be paying some NI that way.

If you're right, my accountant's PAYE software is wrong, my spreadsheet calculations are wrong, and this online calculator is wrong. (The online calculator shows no NI due on a yearly salary of £5035 and £0.24 of NI due on £5036.)

[boredsenseless]

Remember that the amount you can pay in a dividend has a 10% tax credit, and once this is added to the amount you pay, the sum still needs to be below the Hi-rate band to incur no tax

[ASB]

I'm sure I'm paying zero NI on minimum wage (i.e. £9500 pa).

You shouldn't be. NI is payable on each employment individually. But, there is a caveat. If you have two jobs which both pay 30k PA then you will pay NI on 60k of earnings. This is over the UEL. You can claim the extra back.

Quite how it works with two jobs paying 4k each (no NI deductiion) I don't know.

[VectraMan]

Not quite. You'll be paying some NI that way.

4887 is probably a better salary. This is just below the primary NI threshold. [Granted you will lose 10% relief on 5035 - 4887 because you only get the credit against taxable income but this is lower than the NI you would pay]. I beleive you still get a years NI pension credit as well because it is above the LEL but check.

I'm sure I'm paying zero NI on minimum wage (i.e. £9500 pa).

Also consider mileage claims. Claim zero from the company for mileage, claim the amount from you personal tax on your tax return. Allow yourself to go into the 40% band by the amount of you mileage claims. This way you get relief on your mileage at 40% (against your higher rate tax) rather than 19% (or less) against the companys CT.

Never thought of it quite like that. I choose to drive partly because 40p per mile is way more than it actually costs me so I'm effectively paying myself some extra tax free. Back when I was with Parasol (so basically paying full NI and PAYE), I reckoned the tax relief on 40% of 40p per mile was more than the actual cost of travelling, which worked out about £7 per day profit (i.e. I was £7 per day better off driving nearly 200 miles a day than if I'd lived next door to the client).

[ASB]

It's going to take me until 2008 to extract profits I accumulated in the late 1990s. In fact I can only do it that soon because of the rule changes that mean I can use massive pension contributions to offset my IR35 liabilities from this year onwards.

There may be 2 other alternatives.

1) liquidation and capital distribution using ESC C16. This can get you about 40k per sharehold before CGT kicks in. The IR may frown upon serial liquidations but that is their problem.

2) Share buyback. Here you need yourco to buy in it's own shares from the shareholder. A reasonable price to pay is the representation of shareholders funds they represent. You *should* be able to get taper relief. This can then give up to 40k per shareholder as you buy them in. Don't just do this. I understand that this is a transaction the revenue can pre-approve [but I've never done it, our accountants were going to try last year but then I used all my CGT allowance on something else]. Justification is excess capital beyond the business needs.

Edit: also of course this isn't taking the mick one iota. The retained funds have after all already had corp tax paid on them.

[ASB]

If you are definitely not IR35-affected then the optimum arrangement is:-

......

Not quite. You'll be paying some NI that way.

4887 is probably a better salary. This is just below the primary NI threshold. [Granted you will lose 10% relief on 5035 - 4887 because you only get the credit against taxable income but this is lower than the NI you would pay]. I beleive you still get a years NI pension credit as well because it is above the LEL but check.

Also consider mileage claims. Claim zero from the company for mileage, claim the amount from you personal tax on your tax return. Allow yourself to go into the 40% band by the amount of you mileage claims. This way you get relief on your mileage at 40% (against your higher rate tax) rather than 19% (or less) against the companys CT.

There are some who might think this is taking the mick. They'd be right. It is however entriely within the rules and very cost effective.

[IR35 Avoider]

If you are definitely not IR35-affected then the optimum arrangement is:-

1. Pay your self a salary exactly equal to the personal allowance, £5035 this year, which equates to about £420 a month. You don't have to worry about the mimimum wage if you are a director without a contract of employment with your company. A contractor accountant did post somewhere that in his experience paying a low salary had no effect on the likelihood of being investigated. If you are investigated there is nothing they can do about the low salary - they will focus on IR35 and whether you are caught or not.

2. Pay dividends equal to 90% of the sum of the 10% and 22% bands, i.e. 90% of £2,150+£31,150 = £33,300, i.e a dividend of £29,970. The 10% reduction in what you can pay is for the tax credits which come with your dividends and are part of your taxable income. This calculation also assume you have no other taxable income (e.g. bank interest) otherwise you need to reduce the dividends slightly. Ensure that you can prove that each dividend was paid out of profits, and that you knew that at the time (for example by looking at the latest company accounts) and that you create a "minute" documenting the "meeting" at which you decided to declare the minute, and issue yourself a voucher for the tax credit. A common mistake is for contractors to wrongly assume their accountant is taking care of this, just because they take care of everything else. If you don't do this you run the risk that during some future year an investigation will cause 6x£30K = £150K worth of dividends get to reclassified as salary. I'd hate to think what the PAYE, penalties and interest bill on that would be.

3. Decide what to do with the excess money. Theoretically the optimum is to leave it in the company and invest it, and take out in a later years when for whatever reason you haven't earned enought to use up your basic rate band. This might mean after you decide to retire or work part-time.

All the above is based on you being 100% certain of not being IR35-caught. In practise I suspect one can never be that certain, or that Gordon won't do something nasty like introduce NI on dividends, so I would put the excess you don't want to pay in dividends as a company contribution into a pension scheme. The alternative of having savings in the company that you can't distribute (without paying higher-rate tax) is a hassle. It's going to take me until 2008 to extract profits I accumulated in the late 1990s. In fact I can only do it that soon because of the rule changes that mean I can use massive pension contributions to offset my IR35 liabilities from this year onwards.

[malvolio]

But the counter argument is that taking all your profit as dividend could be seen as not helping the busines and that the business is a purely artificial construct to avoid paying tax at all.

And the accountant's answer is that £0 pa is less tax efficient,since you are not taking advantage of the zero-rate and 10% tax allowance bands, which are cheaper than corporation tax.

[VectraMan]

I wonder if paying yourself £0 as salary and just getting dividends is less suspiscious, as at least you can claim there's a legitimate reason for doing so (i.e. helping the business). Paying your allowance as salary is pretty blatantly a tax avoidance measure as there's no other reason you'd choose that number.

Probably not.

[malvolio]

True, but that's the trade-off. There is a theory that if you want to get investigated for IR35, use the "low salary/high regular dividend" approach - legal but suspicious.

However, a director is exempt from minimum salary, so your salary would be the 0% tax threshold, somewhere around £4800 pa. The rest is taken as dividends, which are tax free to you up to the point where your gross income goes over the 40% band start point of around £37k. After that it gets complex.

Ever thought of asking an accountant? Have a word with SJD...

[timhaughton]

BTW minimum wage is about £9500 per year, not the allowance, although I think as a director you're exempt from the minimum wage rules so you can pay just the allowance as salary. Personally I think that's taking the piss.

The chancellor takes the piss out of *us* every year in his budget, I have no problem in returning the compliment.


Tim

[VectraMan]

Yes - the limits don't include the allowance, so effectively the upper rate limit is £38K ish.

But you should ask an accountant to be sure.

BTW minimum wage is about £9500 per year, not the allowance, although I think as a director you're exempt from the minimum wage rules so you can pay just the allowance as salary. Personally I think that's taking the piss.

[timhaughton]

Now I've confused myself even further.

I seem to be reading that the £33,300 is the upper limit for taxable earnings, which doesn't cover the basic allowance. So what I'm reading seems to suggest that I can take £5035 salary, plus £33,300 in dividends, totalling £38,335 a year.

I'm also confused as to whether there's actually a married couple allowance or not. And if there is, whether it's an allowance for the whole couple, or whether it's for each person.

Tim