Ltd Company, Corporation Tax, Dividends etc

Jimmy gurgled happily, sounding much like they were saying:

Very.

For some better than others.

He might be a good consultant, but can he sell? Clients are not forever - he needs to be able to drum up new business, both within a client and from new clients.

I did that for 10 years, as recommended by my accountant, only one difference, I did not pay myself a salary, only the div, and I paid myself

20p per mile.

Oh and I paid my own NI at about 100 per 1/4.

Absolutely no problems whatsoever.

Seems to me your accountant did you no favours re. tax nor NI (assuming you were paying Class 3 NI)

It shouldn't make any difference from a taxation pov.

And it didn't make much difference from an NI pov when the level at which you accrued benefits was equal to the LEL, which it was until a few years ago.

tim

"tim...." wrote

Eh? Higher CT and same IT (zero) is higher taxation overall, isn't it?

It "shouldn't" but it does. Hence abolition of zero CT band and IR35.

There's a big difference between Class 1 at the LEL (or ET if you prefer) and Class 3.

I think we are assuming outside of IR35 here. If we don't do that then there's no point going the low salary/high dividend route and no accountant would recommend it.

I can see that you might lose the zero tax band. Perhaps the OP had investment income that covers it?

Is there. I haven't really looked at the numbers. I assumed that they were similar

tim

No offence, but everything you've written in this thread suggests you haven't any notion of what's being discussed.

I know exactly what's being discussed as I work the same way myself.

As I remember it, under the old rules when you had to pay at least the LEL for that year to qualify for benefits NI was payable on the whole amount (up to UEL)

So on today's figures of a LEL of 95 pw at 11%, the NI on an annual salary of LEL is 543GBP and 52 times the Class 3 payment is 626GBP. These are similar enough not to be worth worrying about (IIMHO).

Yes I know that it doesn't work like that now, but I am pretty sure that there was am period of time when it did

tim

OK - let's take it step by step. You wrote "It [ salary / div split ]shouldn't make any difference from a taxation pov."

It makes a huge difference (until profits become very large).

I pointed out that, while (in many people's view) it "shouldn't" make a difference (i.e. it would be preferable to keep overall tax the same for given profits, regardless of the structure of the business), in fact it does make a difference. That difference used to be much larger than now, hence HMG abolished the zero rate CT band wef FY06, and introduced IR35 about 10 years ago. But rest assured it still makes a big difference.

You went on to comment on IR35 as if it is some kind of option open for the tax-payer to adopt or not as they choose. It isn't. It's the law. So it isn't a matter for an accountant, or any one else, to recommend or otherwise.

You said "I can see that you might lose the zero tax band." There is no zero CT band, and when there was, it applied to all PCTCT - whether "investment" income or otherwise.

(Maybe you had in mind wasting the PA - but that has nothing to do with CT).

Today, you've written "on today's figures of a LEL of 95 pw at 11%, the NI on an annual salary of LEL is 543GBP".

Apart from the fact that today's "LEL" is £97, the NI is nil. I don't think that's very similar to £626.

You say "I know exactly what's being discussed as I work the same way myself." If that's so, then I suggest you get an accountant a.s.a.p.

HTH

This will depends upon your definition of huge.

Paying zero salary with all income in dividends instead of 6K salary and the rest in dividends can only make a difference of 10% of that 6K (i.e you pay

10% CT on the dividend instead of zero on a salary). This will disappear if the person has other investment income to set against the zero rate (which I would suggest many high earners would have).

I immediately accepted that I had made the mistake above. I had overlooked it. You can't use this to say that I have no idea what I am talking about, only that I made a small mistake.

No. I said that I think we must assume that the person IS outside it, not that he can ignore it. I assure you, many of my peers are sure that they are outside it and act accordingly and probably as many do ignore it in the expectation of not getting caught.

I was referring the IT zero tax band

Yes that is what I meant. It may have no effect on CT but it does have an effect on an individual's tax treatment if they receive income with CT paid.

I was using last years figures. I accept that TODAY there is no NI on a salary are the LEL. I was referring to the period of time when IIRC there was (but using last years figures as a comparison as I have no idea what they were 15 years ago) I think that I made this clear in my previous post.

I do have an accountant and I don't use the zero salary method so I don't have to work out how much it might cost me. I was merely commenting that the cost was not that large for someone whose tax bill might be 20K pa. (I agree that this doesn't apply to the OP, but IME his earnings are very low for someone working this method of payment)

tim

OK. But are you aware that on a profit before drngs (or salary) of £15k, taking a salary of zero raises your overall effective tax rate from 13.0% to

21.0%?

Even your exemplar guy with a £20k-ish tax bill will pay over a grand extra in tax. I regard that as pretty significant (e.g. it may cover his accountancy fee) even though he would have profits over £75k - but maybe not huge in your book, hence my rider of "until profits become very large".

It increases total tax by £1,200. That's twice your assumption of £600...!!

Actually it reduces a lot for the low earner. But the £75k guy with investment income matching his PA would pay an extra £2.5k if he didn't take a salary.

OK, but I don't regard a potential tax saving of bwteen £600 and £2,500 more than you thought as small.

That wasn't my point - it was your strong implication that IR35 was somehow a matter for "recommendation" that was mistaken.

I couldn't agree more. Are you subject to IR35 (per the rules) and, if so, do you ignore it nevertheless?

OK - but for future clarity, we call that "Personal Allowance" (as below)

What do you mean by "income with CT paid"? Do you mean Dividends with a tax credit attached? If so, the PA can have an effect, but only in the relatively limited circumstances where the grossed up div pushes some income across a tax-band threshold.

Yes - a bit cheeky of me when we're only just into the new tax year.

And none up to the ET.

The numbers in £s have grown over the years, but 'twas much the same for at least the last 20 years. (I'm assuming you're not wanting to go back to the glorious days of S.E.T.?!!!)

Good.

See my repudiation above.

Well, the OP said £20k to £30k. So his overall tax rate is worse by between

4% and 6% if he doesn't draw a salary.

I assume that not paying NI means that he is risking not having sufficient qualifying contributions as well for his state pension?

Also he is having to pay his accountant for doing his books - and also the accountant raises the formal salary slip each month - on behalf of his company.

So it sounds to me that if he is only paying himself 5kish - which I think is purely to overcome having to pay NI, then he is worse off.

Is that the case?

Thank you (and others) for your comments. (Some of which I could follow :-)

"sufficient qualifying contributions... for state pension" requires (for a company Director) that you receive a salary >= £5,044 (2010-11). However, no NI is payable unless and until salary exceeds £5,715 p.a. Weird but true.

Well, in theory. But in practice the accountant merely submits a NIL PAYE return every 3 months, and end-of-year P35 (plus P60) declaring salary of £5,044 or a bit over.

Actual figures as above. In most cases, salary of £6,475 (which exactly matches annual tax free allowance) is best - despite it resulting in combined EEs and ERs NI of about £180.

"Martin" wrote

Why is 6,475 better than (say) 5,715 ?

I imagine he reckons the NI sacrifice is a price worth paying to simplify things elsewhere. Once the chap's Personal Allowance is known to be used up, there'll be no spare chunks of it needing to be set against any of his other various sources of income, and this can speed up their processing.

In other words, volunteering £180 of NI may avoid the accountancy fees increasing by a similar amount. :-)

"Ronald Raygun" wrote

But if there *are* other sources of income, then paying 6,475 would mean there'll be more of those sources which are taxed at a higher rate...

"Ronald Raygun" wrote

That seems like an expensive accountant!!

Sorry - "best" was the wrong word to use if the difference between NI & CT payment dates is factored in.

My figure simply assumes the effective SCR is between 21% & 22% (unless the

1% increase gets postponed a third time...!). That's enough to tip the balance, because of higher relief on ER's NI.

"Martin" wrote

Do you even need to factor in the different payment dates? - Isn't 5715 better even before allowing for that?

"Martin" wrote

Ah! - I was just looking at *current* rates. Silly me! - must use my crystal ball more often...