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?)
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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.
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)= 73,500Personal allowance = 10,000Taxable income = 63,500Tax on dividends (31,865x10%)+(31,635x32.5%) = 13,467Dividends tax credits = 6,600Total income tax due (13,467-6,600) = £6,867I hope this is helpful and answers your question.
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)= 73,500Personal allowance = 10,000Taxable income = 63,500Tax 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 = 6,600Total 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?
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.