High Rate Taxpayer consequences
Discussion
As a ltd co director I have historically kept my salary / div mix just under the high rate band as my accountant advises but with the new div tax rules coming into play and with me needing a new mortgage in the new year i'm thinking of maximizing my take-home this tax year. I just don't really see what negative impact being a high rate payer would be.
I know that interest on savings is affected (although my investments are in ISA) but I can't see what else would really be affected. I have no dependents, no company car, the business pays my pension....am I missing something?
I know that interest on savings is affected (although my investments are in ISA) but I can't see what else would really be affected. I have no dependents, no company car, the business pays my pension....am I missing something?
Ozzie Osmond said:
What is the "high rate band"?
Many company directors tick over on a very low salary just under the National Insurance threshold and take everything else as dividend.
At the other end of the spectrum if took home £100k last year and push that to £200k this year you will simply pay 5% additional tax on the last £50,000 - i.e. pay tax of £2,500 but get your hands on a lot more cash.
I'm referring to the 40% tax band. I've always kept just below by taking home circa £42k or so out of the business therefore avoiding the additional div tax over and above. I'm just looking to see if it affects me in any other way other than paying the additional tax. Many company directors tick over on a very low salary just under the National Insurance threshold and take everything else as dividend.
At the other end of the spectrum if took home £100k last year and push that to £200k this year you will simply pay 5% additional tax on the last £50,000 - i.e. pay tax of £2,500 but get your hands on a lot more cash.
CRB14 said:
As a ltd co director I have historically kept my salary / div mix just under the high rate band as my accountant advises but with the new div tax rules coming into play and with me needing a new mortgage in the new year i'm thinking of maximizing my take-home this tax year. I just don't really see what negative impact being a high rate payer would be.
Many company directors tick over on a very low salary just under the National Insurance threshold and take everything else as dividend.Regarding PurpleMoonlight's point above, there is a band of income which you don't want to be in. Just over £100k the effective marginal rate of tax jumps to 60% before settling back down to 40%. Put simply, you either want less than £100k or considerably more than £120k.
It's tricky to explain but have a look at the graph in this link, http://blogs.new.spectator.co.uk/2013/03/forget-50...
To add a further point, the taxation of dividends is changing from 6 April 2016. The precise effect will depend upon your particular situation.
At the moment taxpayers in all bands pay quite a bit less tax on dividends than they would on earned income. Everyone with dividend income much over £5,000 will effectively be paying a bit more tax (unless they have a low overall income for the year or have their investments in an ISA).
You get the benefit of £5,000 of dividends tax fee but pay about 7.5% more tax on all the rest. This change by the government was made to,
At the moment taxpayers in all bands pay quite a bit less tax on dividends than they would on earned income. Everyone with dividend income much over £5,000 will effectively be paying a bit more tax (unless they have a low overall income for the year or have their investments in an ISA).
You get the benefit of £5,000 of dividends tax fee but pay about 7.5% more tax on all the rest. This change by the government was made to,
- hit owner/directors who have been getting a nice ride under the previous system, and
- simplify tax collection for HMRC.
Ozzie Osmond said:
Regarding PurpleMoonlight's point above, there is a band of income which you don't want to be in. Just over £100k the effective marginal rate of tax jumps to 60% before settling back down to 40%. Put simply, you either want less than £100k or considerably more than £120k.
Does this really make sense?The marginal rate only applies to income in that band - I'd agree that it is inefficient to take earnings above £100k (unless you need the cash) due to the removal of the personal allowance, but if you take more than £120k, you're still incurring the high marginal costs for earnings within the £100k-£120k range, albeit that your average tax rate will be lower.
Have I missed your point?
sidicks said:
Ozzie Osmond said:
Regarding PurpleMoonlight's point above, there is a band of income which you don't want to be in. Just over £100k the effective marginal rate of tax jumps to 60% before settling back down to 40%. Put simply, you either want less than £100k or considerably more than £120k.
Does this really make sense?The marginal rate only applies to income in that band - I'd agree that it is inefficient to take earnings above £100k (unless you need the cash) due to the removal of the personal allowance, but if you take more than £120k, you're still incurring the high marginal costs for earnings within the £100k-£120k range, albeit that your average tax rate will be lower.
Have I missed your point?
PurpleMoonlight said:
Paying 40% will be cheaper this year than next!
It's 25% marginal tax rate for dividends, increasing to 32.5% next year.Unless you have other tax avoidance plans (entrepreneur relief, pension, dodgy offshore scheme etc.) you should take out as much as you can this year! All the dividend rates are increasing by 7.5% next year, although you do get a pitiful £5k allowance.
sidicks said:
Have I missed your point?
It's all a question of whether you're happy to have an income of £120,000 and pay 40% tax up to £100,000 but 60% on the excess over £100,000. Personally I would try to move the excess into a different tax year, something which is often straightforward for owner/directors who can regulate their own dividend stream. If you actually have an income of £200,000 the additional tax on that limited band is a much smaller proportion of your total tax bill so may be considered less of a concern.
Also if you pay yourself over £50k, then you'll start losing child benefit. With three kids I lose child benefit of £25 for every £100 over £50k, so I reckon my marginal tax rate for earnings over £50k is around 67%!!! 40% income tax, 2% Nat Ins and 25% child benefit.
I do not consider myself wealthy at all.
I do not consider myself wealthy at all.
keith333 said:
Also if you pay yourself over £50k, then you'll start losing child benefit. With three kids I lose child benefit of £25 for every £100 over £50k, so I reckon my marginal tax rate for earnings over £50k is around 67%!!! 40% income tax, 2% Nat Ins and 25% child benefit.
I do not consider myself wealthy at all.
This is when personal pension contributions are really effective - if you've earned £60k and lost £2.5k of CB then £10k of gross pension contribution will have a net cost of barely ~£3.5kI do not consider myself wealthy at all.
The only thing the OP needs to be aware of, if going down the pension route, is that 'eligible earnings' for pension contributions doesn't include dividends. This means you'll only get tax relief on pension contributions (gross) up to the value of your salary. There are options to carry forward from previous years providing you had a pension scheme in place during those years - essentially you don't want to go and dump £10k+ in your pension if you're on the typical small director's salary without speaking to an accountant first, or you may not get the full tax relief.
theboss said:
This is when personal pension contributions are really effective - if you've earned £60k and lost £2.5k of CB then £10k of gross pension contribution will have a net cost of barely ~£3.5k
The only thing the OP needs to be aware of, if going down the pension route, is that 'eligible earnings' for pension contributions doesn't include dividends. This means you'll only get tax relief on pension contributions (gross) up to the value of your salary. There are options to carry forward from previous years providing you had a pension scheme in place during those years - essentially you don't want to go and dump £10k+ in your pension if you're on the typical small director's salary without speaking to an accountant first, or you may not get the full tax relief.
Indeed, though OP states the Company pays his pension so it can pay the full £40k Annual Allowance regardless of his Dividend / Salary mix.The only thing the OP needs to be aware of, if going down the pension route, is that 'eligible earnings' for pension contributions doesn't include dividends. This means you'll only get tax relief on pension contributions (gross) up to the value of your salary. There are options to carry forward from previous years providing you had a pension scheme in place during those years - essentially you don't want to go and dump £10k+ in your pension if you're on the typical small director's salary without speaking to an accountant first, or you may not get the full tax relief.
Op - your Mortgage Provider will need to see the last THREE years SA302s Self Assess calculations and will calculate an average of the 3. I assume you are an owner of the Company so it will need 3 years of Accounts.
Is your wife a Shareholder of the Company? Is she a Director? Do you pay her for her fiduciary duty as such? Is she able to take this payment as a Pension contribution?
Ozzie Osmond said:
It's all a question of whether you're happy to have an income of £120,000 and pay 40% tax up to £100,000 but 60% on the excess over £100,000. Personally I would try to move the excess into a different tax year, something which is often straightforward for owner/directors who can regulate their own dividend stream.
Ozzie - what about this year? Is it worth deferring, knowing that you will be pushing dividends into a less benign regime next year?Jockman said:
Indeed, though OP states the Company pays his pension so it can pay the full £40k Annual Allowance regardless of his Dividend / Salary mix.
Op - your Mortgage Provider will need to see the last THREE years SA302s Self Assess calculations and will calculate an average of the 3. I assume you are an owner of the Company so it will need 3 years of Accounts.
Is your wife a Shareholder of the Company? Is she a Director? Do you pay her for her fiduciary duty as such? Is she able to take this payment as a Pension contribution?
I only have two years but I've been advised this is ok for mortgage purposes. Op - your Mortgage Provider will need to see the last THREE years SA302s Self Assess calculations and will calculate an average of the 3. I assume you are an owner of the Company so it will need 3 years of Accounts.
Is your wife a Shareholder of the Company? Is she a Director? Do you pay her for her fiduciary duty as such? Is she able to take this payment as a Pension contribution?
No I'm not currently married and although I've considered making her a shareholder I'd rather wait until we are married. She could do some bits for the business but we haven't really gone down that line.
I guess part of the answer could be that I increase the pension contributions going forwards - although as I'm 30+ years off retirement part of me thinks i'd rather keep that money within the business just in case.
Another thought I had was to use the retained profit to invest into a fund or bond of some kind.
Jockman said:
Indeed, though OP states the Company pays his pension so it can pay the full £40k Annual Allowance regardless of his Dividend / Salary mix.
Understood - I got the idea the OP might be considering a personal contribution to reduce a higher rate tax liability already incurred this year. I've overblown my own divs slightly this year and plan to do this, though I can only contribute £8480 net to match my £10.6k salary because of the eligible earnings rule.There's some good advice here... OP I'd also hold off involving your partner until married as I believe you're more likely to fall foul of the S660A rules otherwise. I'm in the same boat as far as age and pension is concerned but take the view that if I can't accumulate a fair wedge in SIPPs for the wife and I now right now during our thirties, then I'll only be paying in far more in the future to make up for it.
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