How JustAnswer Works:
  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.
Ask taxadvisor.uk Your Own Question
taxadvisor.uk
taxadvisor.uk, Chartered Certified Accountant
Category: Tax
Satisfied Customers: 4973
Experience:  FCCA - over 35 years experience as a qualified accountant (UK based Practitioner)
54961312
Type Your Tax Question Here...
taxadvisor.uk is online now

I run a business (Ltd company) and turnover around £152,000

Resolved Question:

I run a business (Ltd company) and turnover around £152,000 per year. Before paying myself a salary or Corporation tax, the profit is £152,000. My questions is how can I pay myself (or give myself a dividend) to minimise the amount of tax I have to pay. Do I pay Dividents before paying corporation tax or after? Should I pay myself a salary of 30k for example and then the rest of the profit as a dividend? What tax of I pay on a dividend?


 


EDIT: Profit before paying myself or tax is £105,000.


 


I also need to start paying freelancers £400 per day - what is the total amount including tax I need to factor in for this (i.e. do I pay NI and tax out of the £400 or do I have to pay anything on top of this?)

Submitted: 3 years ago.
Category: Tax
Expert:  taxadvisor.uk replied 3 years ago.
Hello and welcome to the site. Thank you for your question.

If you are employing freelancers, then I presume they are self employed and would account for their tax and NI when filing their personal tax returns.

if this is the case, then you don't have to factor anything for their tax and NI.

You say your profits before tax are £105,000.

Taking a salary of say £30k would mean you would be paying NI as follows:
Employee £2,645
Employer £3.042 (less £2,000 allowance)

Both of these costs are avoidable if you were to reduce your salary to£7,944 and take the rest in dividends as dividends do not attract Nat Ins contribution.

Dividends are distribution of taxed profits.. i.e after corporation tax on profits.
Based on your figures, your profit after tax would be 105,000-(105,000x20%) =£84,000.
Dividends are payable out of this figure...
If your total income including dividends exceeds £41,865 then dividends would attract tax rate of 32.5%, effectively you pay tax at 25% of dividends received after taking into account tax credit.

More information on dividend tax credit can be found here

http://www.hmrc.gov.uk/taxon/uk.htm#1

I hope this is helpful and answers your question.

If you have any other questions, please ask me before you rate my service – I’ll be happy to respond.


Customer: replied 3 years ago.

Hi,


Thanks very much for the swift answer.


This is starting to make sense.


 


So just to be 100% clear:


Freelancers: If I agree to pay a freelancer £400 a day I simply pay them £400 a day and keep a record of this. They pay the tax and NI their end and I am not liable to pay anything else on top of this.


 


Dividends: These are taxed based on the standard Income Tax rates - the only difference is that I will not have to pay any NI and this makes it preferable to taking that money as a salary?


I still don't understand the piece about tax credits.


Can you write out the full answer as an illustrate. i.e. on 105k profit (after I have paid freelancers, myself 7.5k and any other business costs), how does the money get distributed assuming I wanted to pay as much as possible to myself as a dividend..


 


Profit = £105,000


Corp Tax = £21,000


Reaming = ££84,000


 


Can you fill in what happens next please?


 


 


 


 


Are there any rules on how often I can pay myself a dividend (does it have to be once a year or can it be once and month and then I pay the tax at the end of the year based on a self assessment?)


 


Thanks again for the help.


 


 

Expert:  taxadvisor.uk replied 3 years ago.

Josephine, thank you for your reply.

Freelancers ... provided they are self employed and not deemed salaried staff, you are not liable to pay any of their tax and or NI contributions... you just pay them £400 and they pay for their own tax and NI out of it.

Based on your example of profit after tax £84,000, you could pay yourself this whole amount as dividend if you so wish. You don't pay for make a payment annually .. you can make quarterly payments jusy like what some big corporations do, pay quartley dividends to shareholders.

 

I have taken a lower figure for dividends as an illustration ...


Here is an example of what your tax would be if you were to have a salary of £7,500 and say a dividend of £59,400 (tax credit at 10% = 6,600)

Taxable income (7,500+66,000)= 73,500
Personal allowance = 10,000
Taxable income = 63,500
Tax on dividends (31,865x10%)+(31,635x32.5%) = 13,467
Dividends tax credits = 6,600
Total income tax due (13,467-6,600) = £6,867

I hope this is helpful and answers your question.

Customer: replied 3 years ago.

Thanks - I am getting close to understanding and the calculations are really helpful. Can you just finally explain some of the figures. Questions are in bold:


 


 


Here is an example of what your tax would be if you were to have a salary of £7,500 and say a dividend of £59,400 (why a dividend of £59,400 if profit after tax is £84,000?) (tax credit at 10% = 6,600) Is tax credit always 10% of salary plus dividend? Why is this? Does this change at certain thresholds (i.e. if I was earning over 150k with salary and dividends)? The tax credit is then offset against the tax I have to pay yes?

Taxable income (7,500+66,000)= 73,500
Personal allowance = 10,000
Taxable income = 63,500
Tax on dividends (31,865x10%)+(31,635x32.5%) = 13,467 (If the dividend was higher do I then go in to the 40% and 45% tax brackets as I do with a salary?)
Dividends tax credits = 6,600
Total income tax due (13,467-6,600) = £6,867


 


Operationally if I pay myself quarterly dividends do I pay the tax to HMRC quarterly or as a yearly bill at the end of the tax year?


 

Expert:  taxadvisor.uk replied 3 years ago.

Josephine, thank you for your reply..

As I said before, you could pay the whole of £84,000 if you so wish.. I had used £59,400 for illustration purposes only.

Dividends carry a notional tax at 10%. In my example if you receive £59,400 it is equivalent to £66,000 gross less 10% notional income tax deducted. This is tax credit.

If your total income exceeds £150,000 then some of the dividend would be taxed at 37.5%

 

You pay tax to HMRC under self assessment in two instalments based on your tax for the year irrespective of the frequency of dividend payments.


I hope this is helpful... please also look at the link I provided..explains taxation of dividends.

taxadvisor.uk and 2 other Tax Specialists are ready to help you
Expert:  taxadvisor.uk replied 3 years ago.
I thank you for accepting my answer.

Best wishes

Related Tax Questions