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TonyTax
TonyTax, Tax Consultant
Category: Tax
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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hello,I am shareholder in a limited company, in which I work

Customer Question

hello,
I am shareholder in a limited company, in which I work full time (gross income 30 000, 10% share). I am also self employed in a different business that I run (net income 15 000).

Is there a legal way of avoiding paying too much tax?

I have been told that as a shareholder, I could benefit from being paid a "dividend" and a minimum salary, which would see my income tax cut by a certain percentage, and therefore up my income?

My net salary is 1953.00 per month

In other words, how can i increase my income?

yours,
Romain
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.
Hi.

Your salary is subject to income tax and employee national insurance contributions. In addition, your employer pays employer national insurance contributions. If you go here and enter your gross salary and put a 0T tax code in the relevant box, it will tell you how much tax and NIC is paid by you and the company (NIC only). This is on the assumption that your personal allowance can be used against your self-employment income. You can also put in a tax code of 944L if your personal allowance is used against your salary.

You could sacrifice salary and have the money sacrificed put into a pension plan. However, you are limited to the lesser of £50,000 and 100% of your earnings being put into a pension. Both personal and employer contributions count towards that total. You can also use the unused allowance from the three previous tax years.

As you have self-employment income of £15,000, you could use your personal tax allowance against that and take all your income from the company as a dividend which would be treated as basic rate tax paid. Dividends are not subject to national insurance contributions. In theory, provided the company has sufficient post tax profits, you can take up to £37,678.50 in a net of 10% notional tax credit dividend in the 2013/14 tax year and pay no further personal tax but that would be on the basis that you had no other income which you do. Deduct £15,000 from £41,865 (the sum of the basic rate tax band and the personal allowance) and you could draw up to £24,178.50 net of a notional 10% tax credit and pay no tax on it. Take a look here for information on dividends and tax.

Whereas salary is a tax deductible expense for the company, dividends are not so by taking dividends as opposed to salary you are effectively increasing the corporation tax liability of the company. If there is more than one shareholder, dividends have to be paid at the same rate to all of them unless there are different share types or dividend waivers, the use of which has to be carefully managed.

You really need to have a meeting with your co-director/shareholders and your accountant to discuss the matter as there is a balance to be struck between efficient salary and dividend planning. The tax effects on both sides (employee and company) also have to be considered.

I hope this helps but let me know if you have any further questions.
Expert:  TonyTax replied 2 years ago.
Hi again.

I see that you have read my answer to your question. If you need further clarification please let me know. If not, would you kindly rate my answer so that I get paid for my work. Thanks.
Customer: replied 2 years ago.

Thanks for your answer and for developing in details as much as you could.


 


I am having difficulties to understand how it all works, and am still confused to whether or nor I should take the avenue of being paid via dividends.


 


I guess i would like to be clarified, (giving the figures i have exposed), with a comparison of what financial gain i would get, if i was paid via dividends, compare to what i earn now, through business and employment.?


 


If you could do a simplified description of how this would work, i'd be grateful.


 


Many thanks


 


 

Expert:  TonyTax replied 2 years ago.

I cannot tell you what you should do as different people have different priorities. Some prefer a larger salary so they can pension it. Some aren't bothered about pension provision and just want to pay as little tax and national insurance contributions as possible. I'll give you some comparisons so you have something to consider:

£30,000 SALARY & £15,000 SELF-EMPLOYMENT PROFIT

Income tax on salary £4,112

Employee NIC on salary £2,670

Employer NIC on salary £3,078

It costs your company £33,078 to employ you and it saves corporation tax of £6,616 (20%) so the net cost to your employer is £26,462.

The tax on your self-employment income is £3,710 and the Class 4 NIC is £652.

The total tax and NIC paid by you personally would be £11,144.

£30,000 DIVIDEND AND £15,000 SELF-EMPLOYMENT PROFIT


Tax on self-employment income £1,112

Class 4 NIC on self-employment income £652

Higher rate tax on gross dividend of £33,333 £1,549

You would pay tax of £2,661 and NIC of £652 on an income of £48,333 (£45,000 net of 10% tax credit on dividend).

The total tax and NIC paid by you personally would be £3,313.

Because a dividend is not a tax deductible expense for the company whereas salary is, the company's corporation tax liability would be increased by £2,922 (£6,000 lost corporation tax saving on salary - £3,078 employer NIC saving) as a result of paying you a dividend of £30,000 instead of salary.

Of course, as you are only a 10% shareholder, any dividend paid to you has to be paid to other shareholders in proportion. My figures are based on your replacing your salary with a dividend but you could vary it between salary and dividend. In addition,dividends are not guaranteed and the major company shareholders may choose to pay no dividends or low dividends in any year.

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