Minimal salary plus dividends - is it still worth it?

[M4tt-H]

Hi Folks,

I've been freelance for nearly 20 years now, and have watched the introduction of a range of measures over the years to close off the financial advantages of working freelance and taking a small salary and the rest in dividends, and I'm now beginning to wonder if its still worth it? Combining Corporation Tax, Dividend Tax and the usual others together I think unless you are a higher rate tax payer I'm not sure its worth it any more? (and I always make sure I'm not in the higher tax bracket)

I just threw some numbers into Contractor Calculator and if you're earning £50k a year taking £9k as salary and the rest as dividends, you'd need to earn less (£49,200) to get the same take home on PAYE !?

Any thoughts?

[Eric Mc]

Not much in it BUT operating through a limited company still does give you control over how much personal income you want to withdraw (and consequently pay Income Tax/NI on).

If you reverted to (say) a sole trader or an employee you do not have that control.

[M4tt-H]

Thanks Eric, I'm not thinking of doing that, but I'm definately thinking of knocking the small salaries +dividends thing on the head to make things simpler across the payroll - i think my accountants should have recommended the change tbh.

[monkfish1]

M4tt-H said:

Hi Folks,

I've been freelance for nearly 20 years now, and have watched the introduction of a range of measures over the years to close off the financial advantages of working freelance and taking a small salary and the rest in dividends, and I'm now beginning to wonder if its still worth it? Combining Corporation Tax, Dividend Tax and the usual others together I think unless you are a higher rate tax payer I'm not sure its worth it any more? (and I always make sure I'm not in the higher tax bracket)

I just threw some numbers into Contractor Calculator and if you're earning £50k a year taking £9k as salary and the rest as dividends, you'd need to earn less (£49,200) to get the same take home on PAYE !?

Any thoughts?

Also factor in, it will get worse than it already is. The intentions and direction of travel is clear.

[Eric Mc]

M4tt-H said:

Thanks Eric, I'm not thinking of doing that, but I'm definately thinking of knocking the small salaries +dividends thing on the head to make things simpler across the payroll - i think my accountants should have recommended the change tbh.

Personally, I switched my tactics a few years ago to drawing a reasonable salary and withdrawing dividends if and when I need extra.

[Tim330]

Still worth it if you have a non working spouse who you set up your company with as a shareholder to use their tax allowance.

[Swervin_Mervin]

Curious as to why you'd only take £9k as salary and not £12.5k?

[Eric Mc]

Swervin_Mervin said:

Curious as to why you'd only take £9k as salary and not £12.5k?

NI

It has lower thresholds than Income Tax.

[Tim330]

It's still £9,100 for employers NI.

[Simpo Two]

Eric Mc said:

Swervin_Mervin said:

Curious as to why you'd only take £9k as salary and not £12.5k?

NI

It has lower thresholds than Income Tax.

What is the position if you're not 'employed' but living on investments please? I withdraw enough to get to around the personal income tax allowance, but don't pay NI.

[LeighW]

M4tt-H said:

Hi Folks,

I've been freelance for nearly 20 years now, and have watched the introduction of a range of measures over the years to close off the financial advantages of working freelance and taking a small salary and the rest in dividends, and I'm now beginning to wonder if its still worth it? Combining Corporation Tax, Dividend Tax and the usual others together I think unless you are a higher rate tax payer I'm not sure its worth it any more? (and I always make sure I'm not in the higher tax bracket)

I just threw some numbers into Contractor Calculator and if you're earning £50k a year taking £9k as salary and the rest as dividends, you'd need to earn less (£49,200) to get the same take home on PAYE !?

Any thoughts?

Are you taking er's NI contributions into account?

[M4tt-H]

Tim330 said:

Still worth it if you have a non working spouse who you set up your company with as a shareholder to use their tax allowance.

I can't see why that would really make the difference tbh? 2x people drawing £50K as a salary each vs 2x people taking £9k as salary, plus some expenses, then with Corp Tax on the 60-70k, plus dividend tax etc etc.. you're still using the same tax free allowance either way..? (this assumes you add them to your payroll, rather than make them a shareholder)

Edited by M4tt-H on Thursday 30th November 14:25

[Eric Mc]

NI is only charged on "earned income" . It is not charged on "investment income".

Therefore salaries and self employed profits (sole trade/partnership income) are subject to both income tax and NI.

Investment income such as interest, rental income and dividends are subject to income tax only.

[M4tt-H]

LeighW said:

Are you taking er's NI contributions into account?

Actually, that's a really good point - digging in a bit i can see "Employers N.I = £5,644. Total cost to employer = £55,644." (that's on the salary option at £49,210)

[LeighW]

M4tt-H said:

LeighW said:

Are you taking er's NI contributions into account?

Actually, that's a really good point - digging in a bit i can see "Employers N.I = £5,644. Total cost to employer = £55,644." (that's on the salary option at £49,210)

At those levels of profits, unless you are eligible for the employment allowance, the £9100 salary plus dividends is still the most tax efficient profit extraction method.

[Simpo Two]

Eric Mc said:

NI is only charged on "earned income" . It is not charged on "investment income".

Thanks Eric. So, two forms of income but with the same allowance.

I know the difference between capital gain, dividends and income, but there are too many forms of 'income'!

[Eric Mc]

That's because the UK taxation system has evolved over 200 plus years.

Once upon a time "income" of any sort wasn't taxed. Then Income Tax was invented.

NI was created in the early 20th Century to provide funds for the "new" state pension system. Therefore, it was always linked to the income you earned from your work - rather than income derived from savings or other assets (such as shares or land and property).

One significant difference between the way allowances work for tax and NI is that the "tax allowance " (the £12,570 tax allowance we currently get) is offset against your ENTIRE income from all sources. So, if you have pension income of £10,000 and a salary of £12,000, your £12,570 will be deducted from the total income of £22,000.

If you have two or more employments, EACH individual employment will have its NI lower earnings threshold. So, in theory, you could have three separate employments where the combined gross income exceeded £25,000 and still pay no NI at all as long as none of the individual salary amounts breached the NI threshold for each employment.

[xeny]

five firms, all but one employing the next as subcontractor, each employing the same person one day a week?

[Zoon]

xeny said:

five firms, all but one employing the next as subcontractor, each employing the same person one day a week?

Eh?

[Simpo Two]

Zoon said:

xeny said:

five firms, all but one employing the next as subcontractor, each employing the same person one day a week?

Eh?

I think Xeny has come up with a wheeze, or in modern parlance, a cunning plan. Even if it was allowed (I have no idea), the accountant might charge more than the tax saved!