Reply to: Take contractor invoice as PAYE

[ASB]

In terms of dividend taxation going forwards I expect to see dividends being taxed at the marginal tax rate. They have already been taxed to ct and the overall effect would be to make the total take broadly equivalent to tax and ni.

I would also expect the ability to move this to capital taxes to be tightened significantly.

[ASB]

Thanks for your detailed response.

So if I don't want to put any aside for pension (personal reasons), what would be the best strategy going forwards?

Take £10K salary, claim £10K expenses, take £5K dividends, (free of tax), take a further £28K as dividends (despite having to pay 7.5% tax) and leave the rest in the bank for the next year, hoping the law changes favourably?

I don't know what is best for you.

To start with you obviously need to draw enough to live. If that happens to be below the higher rate threshold then probably draw up to the higher rate threshold anyway.

Now you need to consider what to do with the rest; and how you can extract it in the most tax efficient way.

Given you are looking at 100k area even working half the year is likely to put you higher rate anyway.

I would suggest that if you can 100k within the company that should be a decent buffer. Beyond that there is an argument to take the lot and suffer the tax since you can only get it out at lower rates by liquidating - likely in the sights for change. Or by having no other income and getting it out over a number of years.

The above would be my approach, for my circumstances and general attitude. But I have no debt.

If you have debt then I could see a case for draining the company more and paying down that debt. How much buffer you need? Generally I would say at least 1 year of normal spending.

But, if one had a flexible mortgage then if lots has been paid off by draining then a lower buffer could be used. The surplus being easily available if required.

Anothe issue with amassing the cash is that maybe you pay off a mortgage and want to take a big chunk > 150k then this would be tax inefficient if needing it in the same year.

Finally I think it is reasonable to assume that taxation can only get worse.

The above gives some of the major threads. Consider them in the light of your own position.

Reconsider pension, though it does depen on you age since it is being tied up until 55. There are cash funds and very low charges if you are concerned about investment risk and cost. There is a theoretical advantage in that it is not included for means tested benefits if everything goes completely wrong. Also there can be iht advantages, getting fund value straight to beneficiaries without it ever being part of your estate should you die before tsking benefits.

[northernladuk]

Yes. Or if you end up on the bench which will happen.

[smileyface]

It's not a stab in the dark. It is actually quite specific. (Eventually )

The question becomes:

Q1: If I pay a gross 90k including Er's NI salary next year - how much do I get in my hand. A1: Approx 53,750
Q2: If I pay a 10k salary and the remainder as a dividend next year - how much do I get in my hand. A2: Approx 61,500
Q3: Opt how much am I getting stuffed by this new tax. A3: Approx 3,500

It's still a decent saving.

Thanks for your detailed response.

So if I don't want to put any aside for pension (personal reasons), what would be the best strategy going forwards?

Take £10K salary, claim £10K expenses, take £5K dividends, (free of tax), take a further £28K as dividends (despite having to pay 7.5% tax) and leave the rest in the bank for the next year, hoping the law changes favourably?

[ASB]

Damn I hate these stab in the dark figures threads. Always end in mayhem.

It's not a stab in the dark. It is actually quite specific. (Eventually )

The question becomes:

Q1: If I pay a gross 90k including Er's NI salary next year - how much do I get in my hand. A1: Approx 53,750
Q2: If I pay a 10k salary and the remainder as a dividend next year - how much do I get in my hand. A2: Approx 61,500
Q3: Opt how much am I getting stuffed by this new tax. A3: Approx 3,500

It's still a decent saving.

[northernladuk]

Damn I hate these stab in the dark figures threads. Always end in mayhem.

[ASB]

edit: No I think that is complete tosh for next year.

Salary 10,000
Dividend 63,792

Total 73,792

Next year

5,000 = Nil
27,000 = 7.5% = 2025
31,792 = 32.5% = 10332

Total 12,357 = 3,695 additional tax. = 51435 net + 9740 = 61,175. Compared with 53,750 if paid as salary.

But there is 1k of unused personal allowances in there which I can't be bothered to factor in.

Found this: http://www.contractoruk.com/calculat...alculator.html

[PurpleGorilla]

Then you are open to performance reviews and sh*t.

Bet you'd be a bad ass boss!

[ASB]

Thanks, I agree.

Here are my thoughts;

As I understand, from April 2016, the first £5K of dividends is not taxed. After that, the next £28K approx. is taxed at 7.5% and then the rest at £32.5%.

So with £100K, if I take £10K as salary and another £10K as expenses, that leaves £80K. Corp tax is at 20%, so 0.8 * £80K = £64K.

First £5K of div is tax free, next £28K is taxed at 7.5%, remaining £31K is taxed at 32.5%.

So IF I were to take the £64 as dividends, I end up with: £5K + £25.9K + £20.925K = £51.825K.

Even if I add my £10K as salary and £10K as expenses, I only end up with £71.825K, ie not mch better than PAYE.

Have I miscalculated somewhere?

So, on the assumption that you have 100k of billings and zero costs then there is a gross profit of 100k. If this were all taken as salary then this is a gross salary of 88,850 + Er's NI 11,141 giving a net post tax salary of 58,858.

If the contract is within IR35 then your are pretty much stuck with this or something similar (save for taking pensions).

Obviously you can't just "take" 10k as expenses. They have to be incurred, but let's assume they are.

As you surmise this will leave approx 64k for dividends. Except it won't quite.

10k salary costs 260 in EE's NI and 232 in ER's. So it leaves 9,740 in your pocket and actually will leave

100,000 - 10,000 - 10,260 = 79740 x .8 = 63792.

Now, first thing you need to do is gross it up for the nominal 10% tax credit ( x 10/9) = 70880

Currently:

600 = 0 (balance of personal allowance)
31785 = 0 (basic rate band)
38495 @ 22.5 = 8661.38 (allowing for the tax credit)

Total yield = 9,740 + 63,792 - 8662 = 64,870. +10k exps = 74,870

Obviously this is comfortably ahead of the 100k salary route of 59,000. (But really you should calculate based on a 90 gross including Er's NI to compare like with like -this would be 53,750 appx+ 10k = 63,750)

In any event you arecomparing 53,750 to 64,870. You may or may not regard that as significant.

[strike]With the advent of thenew dividend tax, who knows ? But it seems likely there will be further additional tax of 31,785 - 5,000 x 7.5% = 2,000 tax to pay extra. So this brings it a bit clearer; but still usefully better off.[/strike]

Of course whether or not simply ensuring everything in the company pot ends up immediately in your hands may not be prudent.

And I could have gone wrong in my calculations.

edit: you can of course fill in a "dummy" tax return in your self assessmentaccount and not submit it to play around with numbers.

edit: No I think that is complete tosh for next year.

[SueEllen]

Ps: if you can get a permie £100k job, take it.

Then you are open to performance reviews and sh*t.

[northernladuk]

Ps: if you can get a permie £100k job, take it.

I'd be thinking hard about the 70k job up here!!

[PurpleGorilla]

Yes.

£100k salary is rare as rocking horse tulip.

£100k contract £450ish/day is common.

Maybe think about comparing a £70k salary with a £100k contract.

HTH, PG

Ps: if you can get a permie £100k job, take it.

[PurpleGorilla]

Have I miscalculated somewhere?

Yes.

£100k salary is rare as rocking horse tulip.

£100k contract £450ish/day is common.

Maybe think about comparing a £70k salary with a £100k contract.

HTH, PG

[northernladuk]

Are you factoring bench time or just going on straight cash values?

[smileyface]

Taking it all as salary is tax inefficient. You will pay high rate tax on a big chunk, which is a lot more than CT. Speak to an accountant for the best strategy with you circumstances.

Ps: £100k p/a is perfectly reasonable.

Thanks, I agree.

Here are my thoughts;

As I understand, from April 2016, the first £5K of dividends is not taxed. After that, the next £28K approx. is taxed at 7.5% and then the rest at £32.5%.

So with £100K, if I take £10K as salary and another £10K as expenses, that leaves £80K. Corp tax is at 20%, so 0.8 * £80K = £64K.

First £5K of div is tax free, next £28K is taxed at 7.5%, remaining £31K is taxed at 32.5%.

So IF I were to take the £64 as dividends, I end up with: £5K + £25.9K + £20.925K = £51.825K.

Even if I add my £10K as salary and £10K as expenses, I only end up with £71.825K, ie not mch better than PAYE.

Have I miscalculated somewhere?