Reply to: Dissatisfaction with accountant's advice

[contractorsaccountant0704]

The straw that breaks the camel's back

Hi,

I’m having an issue with my accountant and I was hoping that I could get some confirmation on either her or my view, as well as suggestions on how to proceed if I’m unhappy with the advice I’m receiving.

The issue is associated with my intended salary for 2013/14. I’ve just completed my first year of contracting, and had paid myself a low salary (£8200) and supplemented this with quarterly dividends, the latter being based on how much retained profit I had in the company. So far, so good.

This year, when I said I intended to keep my salary at £8200, my accountant recommended that instead I increase it to £9620.24. Initially, their reasoning was that I needed a higher salary to qualify for the state pension. I challenged this, saying that my understanding was that my salary only needed to be higher than the NI Lower Earnings Limit for it to count as a qualifying year.

The accountant backed down on the qualifying year point, but then claimed it was “more tax efficient” to take their recommended salary – I can supply the (to me, spurious) figures they used to support this argument if that helps.

Firstly, please tell me that I’m not crazy, and the accountant is giving me duff advice. Or, alternatively, please could someone explain why paying myself so much above the NI Primary and Secondary Thresholds is “tax efficient” rather than paying the money through a dividend route?

My second ask is (presuming that I’m right that she’s wrong...) what should I do about the accountant? This is one of the major players in the space, I’m paying significant sums of money each month, and I’m currently convinced that the accountant is giving me incorrect advice.

Thanks for any advice.

Lambert, You are not crazy.
But I too wonder what else is wrong. If you are aggravated enough to a) question your advisor and b) sound out colleagues on the forum , then you are an unhappy client. Just because your with a major player doesn't mean you are getting value for money - does it? You have been given advice, and you can ignore it, and you could do it yourself - but if you were going to do either, why would you have employed them in the 1st place ?

[Jessica@WhiteFieldTax]

Don't worry Jessica (small head pat) there is nothing more likely to cause brain fog than tax

[malvolio]

Don't worry Jessica (small head pat) there is nothing more likely to cause brain fog than tax

Which is why I always delegate such things to accountants. Oh, hang on...

[LisaContractorUmbrella]

Maybe

Anyway despite it being my day off - or maybe because - I've gone back to basics.

Mea Cupla, you are right. I was confusing the PA being non repayable with it being wasted - logic crash.

On a scenario of no other income and taxpayer below retirement age your figures are right. If the taxpayer is above retirement age then £9,440 is better - take out the Ers line to prove it.

** wanders off muttering about complexity of tax system **

Don't worry Jessica (small head pat) there is nothing more likely to cause brain fog than tax

[Jessica@WhiteFieldTax]

Yeah. Maybe I should design an online app for it.

Maybe

Anyway despite it being my day off - or maybe because - I've gone back to basics.

Mea Cupla, you are right. I was confusing the PA being non repayable with it being wasted - logic crash.

On a scenario of no other income and taxpayer below retirement age your figures are right. If the taxpayer is above retirement age then £9,440 is better - take out the Ers line to prove it.

** wanders off muttering about complexity of tax system **

[inniAccounts]

Yeah. Maybe I should design an online app for it.

It'll never catch on...

[Contreras]

Of course, I'm approaching this with a tax persons logic, you with a programmers (I think). Hopefully we meet in the middle

Yeah. Maybe I should design an online app for it.

[Jessica@WhiteFieldTax]

Sorry, what you say is undoubtedly correct but I still don't get it! .

I think you'd need to rerun those figures on a slightly lower income scenario, so the salary differential is sufficient to flip the dividend in and out of BR?

Logic says that at that level dividend is taxed at 40%, whereas assuming no other income and salary less than PA, salary will only be taxed at 26% NI rates.

Of course, I'm approaching this with a tax persons logic, you with a programmers (I think). Hopefully we meet in the middle

[inniAccounts]

Contreras you're right - there is a benefit, it's marginal, but it's also free money. I've just updated our calculator with 2013/14 rates so you quickly play around with your salary and it will do a full EE/ER NIC calc, income tax (on sal and divs), corp tax, etc. Like a spreadsheet. But a bit prettier.

You'll find the calculator here: http://www.contractor-tax-calculator.co.uk

Here's a screen grab of your first scenario in the calc:



There's a tiny difference in the NIC calc (84p) as this is using weekly NIC thresholds x 52 rather than the annual values.

[Contreras]

Its what I would expect in most circumstances, but to asses it properly you need to factor in marginal rates of Income Tax.

EG if someone was just on Higher Rate threshold, every extra £of net dividend is 25% tax.

By contrast take that as salary in the range £7,696 to £9,440 then you potentially use wasted PA, saving you 40%, for a 26% NI cost.

However if there is other income to use the PA, then not necessary.

Sorry, what you say is undoubtedly correct but I still don't get it! All I can see is the "take home" is reduced as dividends are progressively replaced with salary. Not by a big difference admittedly. But that doesn't stop me wanting to understand why some people are being advised to pay at or above the PA.

For comparison I'm assuming the company has no expenses other than salary+NI, the individual has no other income, and the company retains no profit starting with the same turnover in each case.

Turnover               £45,800.00   £45,800.00   £45,800.00   £45,800.00   £45,800.00
Gross salary            £7,755.00    £8,000.00    £8,500.00    £9,000.00    £9,440.00
Employers NI                £8.14       £41.95      £110.95      £179.95      £240.67
Employees NI                £0.00       £29.40       £89.40      £149.40      £202.20
Corporation Tax         £7,607.37    £7,551.61    £7,437.81    £7,324.01    £7,223.87
Net salary              £7,729.00    £7,945.24    £8,386.54    £8,827.84    £9,216.18
Net dividends          £30,429.49   £30,206.44   £29,751.24   £29,296.04   £28,895.46
Gross dividends        £33,810.54   £33,562.71   £33,056.93   £32,551.15   £32,106.07
Gross income           £41,565.54   £41,562.71   £41,556.93   £41,551.15   £41,546.07
H.R. tax on dividends      £26.00       £25.36       £24.06       £22.76       £21.62
Total net income       £38,158.49   £38,151.68   £38,137.78   £38,123.88   £38,111.65
Retained profit             £0.00        £0.00        £0.00        £0.00        £0.00

I smash the 40% rate, average about 60K divs per year

Right, so no nowhere near the High Rate threshold then.

[Notascooby]

I smash the 40% rate, average about 60K divs per year

[Jessica@WhiteFieldTax]

Not what you expected?

Its what I would expect in most circumstances, but to asses it properly you need to factor in marginal rates of Income Tax.

EG if someone was just on Higher Rate threshold, every extra £of net dividend is 25% tax.

By contrast take that as salary in the range £7,696 to £9,440 then you potentially use wasted PA, saving you 40%, for a 26% NI cost.

However if there is other income to use the PA, then not necessary.

[Platypus]

So on face value it looks like the advice is costing you an extra £84 in tax + NI. Not what you expected?

It's a long time since I wrote my own spreadsheet for this, but I do recall that employee's NI has a threshold (the primary threshold?) and your figures don't seem to be taking it into account, so your figure for ER's NI is too high.

[Contreras]

I'm getting the same advice of £9440 and I think they're talking crap....

I've asked for a breakdown as to why £9440 is better than £7696.

OK advice is

There would be no PAYE Tax or NI payments to make on a £7,696 salary, so it is efficient in the respect that neither yourself or the company will pay any Tax/NI to HMRC.

With the £9,350 net salary, there would be £33.25 PAYE Tax due, £222.99 in Employee’s NI and £263.61 Employer’s NI due. So with paying the extra £519.85 to HMRC, you are able to earn an extra £1,134.

Sold to the man without a scooby.

Thanks for sharing the numbers. Although £9350 net doesn't tally with the £9440 gross mentioned originally and there is still something missing in the rationale. Either specific to your circumstances or just plain wrong.

But you need to compare that to the cost of exacting a dividend?

OK let's see:

Turnover         A                      £9,869.85     £9,869.85
Gross salary     B                      £7,696.00     £9,606.24
Employers NI     C = (B-7696) * 13.8%       £0.00       £263.61
Employees NI     D = (B-7755) * 12%         £0.00       £222.15
Income Tax       E = (B-9440) * 20%         £0.00        £33.25
Corporation Tax  F = (A-B-C) * 20%        £434.77         £0.00
Net salary       G = (B-D-E)            £7,696.00     £9,350.84
Net dividends    H = (A-B-C-F)          £1,739.08         £0.00
Net income       I = (G+H)              £9,435.08     £9,350.84
Retained profit  J = (A-B-C-F-H)            £0.00         £0.00

So on face value it looks like the advice is costing you an extra £84 in tax + NI. Not what you expected?

OK if you like paying tax but then why stop there when you could pay salary of £10k, £12k, etc.?

I maintain that £7755 is the optimum salary, but quite happy for others to pay more of course.

[Jessica@WhiteFieldTax]

OK advice is

There would be no PAYE Tax or NI payments to make on a £7,696 salary, so it is efficient in the respect that neither yourself or the company will pay any Tax/NI to HMRC.

With the £9,350 net salary, there would be £33.25 PAYE Tax due, £222.99 in Employee’s NI and £263.61 Employer’s NI due. So with paying the extra £519.85 to HMRC, you are able to earn an extra £1,134.

Sold to the man without a scooby.

But you need to compare that to the cost of exacting a dividend?