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Sam, Accountant
Category: Tax
Satisfied Customers: 14157
Experience:  26 HMRC expertise, PAYE, Self Assessment ,Residency, Rental Income, Capital Gains, CIS ask for Sam Tax
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I currently am a company director . I looking to pay myself

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I currently am a company director .
I looking to pay myself gross 120k a year
I need help on working out the best way forward on my self assessment form . Currently these are my thoughts
This is what I am going to do with the 120k
£20,000 paid into SIPP ( what would my tax relief be and also what could I claim back through Self Assesment ?)
£100,000 paid to me through dividends after allowances have been deducted
The business arrangement I have is I have to take the income through dividends .
I need to know what would my tax bill be with that scenario . And if there is a better way
Hello, I'm Keith and happy to help you with your question.
As a director of a company you are an employee per se and must be remunerated under PAYE arrangements.
100K could be paid through dividends, but these would not be allowable against the Company's Corporation Tax (CT) liability thereby exposing the company to an increased CT bill that would have been had the 100K been a salary. Furthermore they will be grossed up for tax in your hands at the appropriate marginal rates.
Individuals have little room for manouvre in such situations. Payments into private pension schemes are about the only big money spinner. Professional fees, motor mileage and the like are but small beer in comparison. However, even these are limited to 40K in the tax year 14/15, 50K in 13/14, ditto 12/13. With a SIPP you can go back to prior years and mop up any unused pension contribution levels, but in any event contributions may not exceed 100% of salaries in each tax year. You have no salary in your scenario so you have no salary to offset pension contributions.
On your current scenario you are looking at tax on 100K. After your personal allowance, 10K at 14/15 rates, that leaves 90K liable to tax. That would be of the order of 30K. There are better ways of ordering your moneys, for example, paying yourself a salary and mopping up liability with the use of pension contributions from either the company or you personally and I earnestly advise you to seek the assistance of a local, trusted professional in ordering your financial affairs as considerable sums are involved.
I am so sorry to have to rain on your parade.
Customer: replied 3 years ago.
Relist: Inaccurate answer.
Completely incorrect answer
I know the ball park figure so I want to just make sure of it
If you know the ball park figure then you can compare it with the realities of your situation.
Thanks for your question, I am Sam I am happy to provide what you have asked for.
You have two ways to approach this, and I have provided both scenarios
The first
£120K paid as dividends
As dividends will have suffered a 10% tax deduction from your limited company, this will be treated as you having been paid a gross figure of £132,000
As this is in excess of £120,000 you will lose your entitlement to personal allowances, so first the tax position is considered. With tax dividends you would have the first £31865 liable to 10% (which has already been suffered at source) so this just leaves the balance of £88,145 to consider at the higher rate, which is 32.5% of which 10% would already suffered (so in essence (22.5%) this creates a tax bill of £19832.63
This is based on 2014/2015 tax allowances and rates.
Let me know if you have any follow up questions on the answer I have provided.
But then as you will place £20,000 into a SIPP which would only have received the benefit of 20% tax relief, but as dividend income is not treated as allowable earned income on which can be considered or pension contributions, you will lose the ability to claim this additional tax relief.
So the second scenario which would benefit you would be as follows
Salary £20,000 and a dividend payment that leaves you with £100,000 but would be treated as £110,000 gross from the company.
As this situation still sees you in excess of a combined income of £120,000 once again you would lose your entitlement to personal allowances.
But a gross salary of £20,000 would see tax due of £4000 (at 20%)
Then the gross dividend of £110,000 would see the first £11865 paid tax free (as 10% notional tax already suffered at source) and the remaining £98,135 liable to 32,5% less the 10% notional tax suffered - so 22.5% = £22080.38 plus the 20% tax suffered on the salary - so tax overall due of £26080.38
Then the SIPP contribution would attract further tax relief, and as only 20% given in the SIPP then a further 20% tax relief would be due - which is £4000
This £4000 is then deducted from your self assessment tax bill bringing you back down to a bill of £22080.38
Scenario 1 shows to be the best route as you can see, but I must advise that HMRC will argue that the £20,000 initially paid into the SIPP has received a 20% tax relief on payment, which will be argued is NOT due as only up to £3600 attracts tax relief when there is no relevant earned income, so you are best following scenario 2 (although along with the tax advised there would also be Employee and Employer Class 1 national Insurance due which would amount to a further £4000 approx)
But you would utilise your position to that which is most tax efficient
Let me know if you have any follow up questions on the information I have provided
Customer: replied 3 years ago.
Thank you so much for this comprehensive answer
Would ithe better if the company pays £20,000 directly into my SIPP
And I get paid £90,000
After my tax free allowances the rest in dividends ?
Thanks for your question
No, you have to have been paid the money as salary for it to be considered as due tax relief for SIPP purposes, so by passing you, and getting the company to pay this directly, would see you only due tax relief on £3160 of the payment made.
I can see its attraction as it would avoid taxation under PAYE arrangements, tax and employee and employer Class 1 National Insurance) but again negates it being recognised as the appropriate amount on which tax relief can be given.
But lets look at what impact that has - (the excess of pension relief would be £3368)
Then a dividend of £90,000 would be treated as a gross dividend of £99,000
You would have your full allowances of £10,000 leaving £89,000 to consider, of which the first £31865 would attract no further tax due and the balance of £57,135 at 22.5% (32.5% due less 10% suffered) = £12855.38
Plus the claw back on the pension relief of £3368
So a total of £16223.38
But If you remained having the benefit of the £20,000 salary paid to you plus a gross dividend of £99,000 - which would see your income totalling £119,000 - so would still loose all but £500 personal allowances
You Then would have the first £500 tax free -
So only £19,500 of the salary would be liable to 20% tax = £3900
Then of the £99,000 dividend, the first £12365 would attract no further tax, as the 10% tax has been suffered - this would leave £86635 liable to 22.5% (32.5% - 10%) = £19492.88
Total tax due of £23,392.88
Then the payment to the SIPP would be due a further 20% Tax relief - SO £4000 deducted so a final tax position of £19392.88 (plus Class 1 Employee and Employer National Insurance so approx. £23000 due in total)
I should just as an aside also advise that its always advisable to draw salary - even if just up to the National Insurance threshold, and on the position where you draw £20,000 salary - whilst not so tax efficient - it will then ensures an on going contribution to state pension and other state benefits.
Sam, Accountant
Category: Tax
Satisfied Customers: 14157
Experience: 26 HMRC expertise, PAYE, Self Assessment ,Residency, Rental Income, Capital Gains, CIS ask for Sam Tax
Sam and other Tax Specialists are ready to help you
Customer: replied 3 years ago.
Thank you Sam
You've more than answered the fee's worth .
IF acceptable I will pay for some more advice next week on this senario
I would like to ask what the best working out would be if I had 120k to play with .
Including playing myself a salary
Company paying direct into my pension
Me paying into my pension
And taking dividend .
I will send over the request on Monday as I'm out with the kids at the moment .
Thanks for your response and of course you can ask a further question after the weekend.
Just post the new question, and if you would prefer me to answer (as all questions appear on an open board to all experts) just advise you would like to wait for me to answer.
Have a lovely time with the kids (mine at 21 and 17 are still in the land of nod!)