Salary vs dividends

[trowelhead]

Hello all,

Just met with my accountant who suggested that drawing a PAYE salary from my company might be better for me than drawing a small salary plus dividends.

This is because i would be paying tax as it is earned so i'll never be "behind", vs drawing dividends and then paying tax a year later etc.

I thought this was really tax inefficient, however using some online calculators seems like there is much less in it these days?

Figures attached as an example for £90k profit made in a ltd company (as an example)


Salary and dividends:

However, tax due at company level of 19% of 77500 dividend so £14725 of corp tax paid...
Total tax + nics = £16126.66 + £14725 = £30,851.66



Salary PAYE - however in the £90k example, there would be 0 corp tax due to the ltd company as salary is tax deductible from the company profits?

Total tax + nics = £29,261


I have no wife or anyone else to add as shareholder really so using those calcs more efficient to draw the salary - or am i missing something?

[Mr Pointy]

Are you making any pension payments from your company? I thought they made a considerable difference to the tax paid, although I don't know how it would differ between the the two scenarios.

[NickCQ]

Does the second example include employer’s NICs? I think the first one does. (Edit: and is that relevant?)

[Mr Pointy]

There's a few calculators on the ContractorUK site; have a look at this one:
https://www.contractoruk.com/calculators/limited_c...

https://www.contractoruk.com/limited_companies/con...

https://www.contractoruk.com/calculators

You can vary the salary you take up to 100% of your profit. I don't see it accounting for pension payments though.

[MOBB]

Yes there will be a fairly large ers nic amount to consider with a large salary

The only instance I can think of where large salary would trump dividend would be if you are useless at managing your finances, ie keeping tax money aside

But it is closer than it used to be

[JulianPH]

Yes!

You are missing out employer NI contributions (that your company would have to pay) on the PAYE calculator (as they don't show there - only employee NI).

Factor this back in and you will see that the dividend route is still significantly better (even though not as good as it used to be).

Add some tax free company pension contributions that are offset against corporation tax and you are laughing (as much a highly taxed person can laugh!!!).

Give me a shout if I can explain further





Edited for clarity

Edited by JulianPH on Saturday 10th August 17:36

[anonymous-user]

One slightly dodgy trick if the biz has a finite span... halve the dividend and invest the rest in index trackers within the company. Then close company and claim entrepreneurs relief.

[trowelhead]

Mr Pointy said:

Are you making any pension payments from your company? I thought they made a considerable difference to the tax paid, although I don't know how it would differ between the the two scenarios.

Yes i am, but left that out for simplicity

NickCQ said:

Does the second example include employer’s NICs? I think the first one does. (Edit: and is that relevant?)

No it does not and that's what i was missing in my calcs! Thought it seemed odd...

MOBB said:

Yes there will be a fairly large ers nic amount to consider with a large salary

The only instance I can think of where large salary would trump dividend would be if you are useless at managing your finances, ie keeping tax money aside

But it is closer than it used to be

Yes thanks, i'd missed the employers nics - i have been rubbish at setting tax aside - doing my best to put that right going forward however thats why he suggested considering the salary option, i want to do the maths first to see what the difference is...

JulianPH said:

Yes!

You are missing out employer NI contributions (that your company would have to pay) on the PAYE calculator (as they don't show there - only employee NI).

Factor this back in and you will see that the dividend route is still significantly better (even though not as good as it used to be).

Add some tax free company pension contributions that are offset against corporation tax and you are laughing (as much a highly taxed person can laugh!!!).

Give me a shout if I can explain further





Edited for clarity

Edited by JulianPH on Saturday 10th August 17:36

Bang on - i did think i must be missing something so thanks for pointing this out!

Using another online calculator - it estimates employers NICS on £90k salary to be £10,600 pa! So that's the difference then.

I am making small employer pension contributions monthly but might look to increase those when i've worked everything out.

So if i wanted to stick to salary + dividends, in this example - simply put away £16,126 / 12 so set aside £1300 a month for personal tax and leave £1200 ish in company for corp tax?

Thanks everyone for replying - i knew i was missing something

Edited by trowelhead on Sunday 11th August 01:26

[trowelhead]

Sambucket said:

One slightly dodgy trick if the biz has a finite span... halve the dividend and invest the rest in index trackers within the company. Then close company and claim entrepreneurs relief.

That's not a bad idea - i did look into it briefly.

[MOBB]

If setting aside tax is the main driver, maybe instead of paying over monthly paye and nic on a large salary, pay over corporation tax and personal tax on the dividends monthly instead? Unorthodox but allowed as far as I’m aware?

[anonymous-user]

OP, do you not already pay tax on your divis ahead biannually on account?

[JulianPH]

trowelhead said:

Bang on - i did think i must be missing something so thanks for pointing this out!

Using another online calculator - it estimates employers NICS on £90k salary to be £10,600 pa! So that's the difference then.

I am making small employer pension contributions monthly but might look to increase those when i've worked everything out.

So if i wanted to stick to salary + dividends, in this example - simply put away £16,126 / 12 so set aside £1300 a month for personal tax and leave £1200 ish in company for corp tax?

Thanks everyone for replying - i knew i was missing something

Edited by trowelhead on Sunday 11th August 01:26

You would be better off having the company make a gross pension contribution for you. This way there is no tax whatsoever on the contribution, plus the contribution can be offset against the company's annual corporation tax bill.

Extremely tax efficient!

[anonymous-user]

If you trust the government!

[NickCQ]

Sambucket said:

If you trust the government!

Trust them to do/ not to do what?

[anonymous-user]

Change the laws around access age to pensions. More of an issue for early retirees, I guess.

Also who knows what the tax laws will be in 20 years when you come to draw down. There is a small risk you might even pay more tax. Depending on your income.

[snowy]

JulianPH said:

You would be better off having the company make a gross pension contribution for you. This way there is no tax whatsoever on the contribution, plus the contribution can be offset against the company's annual corporation tax bill.

Extremely tax efficient!

Is it Tax efficient? or is it the same, as paying direct from the Company you then dont get the 20% Tax uplift from a personal contribution, so are the figures exactly the same ?

[anonymous-user]

You save 19% corporation tax and ENICS too

[JulianPH]

snowy said:

Is it Tax efficient? or is it the same, as paying direct from the Company you then dont get the 20% Tax uplift from a personal contribution, so are the figures exactly the same ?

Sambucket said:

You save 19% corporation tax and ENICS too

As Sam says, make the payment from taxed income and NICs come into play.

Getting the company to make the contribution reduces the cost of NICs and also reduces the profit of the company, thereby reducing the corporation tax bill.

So yes, this is much more tax efficient.

[trowelhead]

MOBB said:

If setting aside tax is the main driver, maybe instead of paying over monthly paye and nic on a large salary, pay over corporation tax and personal tax on the dividends monthly instead? Unorthodox but allowed as far as I’m aware?

Yes this was another option mentioned, might actually do this.

As far as i am aware its perfectly fine to do so.

janesmith1950 said:

OP, do you not already pay tax on your divis ahead biannually on account?

Yes, however POA is an estimate based on last years earnings so it can be way off.

JulianPH said:

You would be better off having the company make a gross pension contribution for you. This way there is no tax whatsoever on the contribution, plus the contribution can be offset against the company's annual corporation tax bill.

Extremely tax efficient!

Thanks Julian, i a have just started doing them now (gross employer contributions monthly) albeit not a huge amount. However, yes it's night and day tax free vs 45%+ taxed...

Sambucket said:

Change the laws around access age to pensions. More of an issue for early retirees, I guess.

Also who knows what the tax laws will be in 20 years when you come to draw down. There is a small risk you might even pay more tax. Depending on your income.

I would always prefer to use an ISA first for the reasons you have said, plus it's nice to always have access to cash. But as part of a mix, a small amount in a pension is worth doing.

[JulianPH]

I find it funny how people consider the rules of ISAs are somehow set in stone!

They are as easily changeable as the pension rules. Labour will do this, if allowed the chance.

(I don't say this as some form of political statement, just a financial one)