I watched a video about how to draw salary and dividends from a Ltd company in order to save on tax. It's tricky but I get it, however, what happens when you want to wind up a ltd company and close shop can you get hit for a load of Tax then? How does it work? I guess the other option would be to sell the business on but what would the tax implications be then?
being limited is very different to being self empoyed in that you are an employee of a company that you own.
You have a fiduciary duty of care for your company similar to a parents duty of care over a child. If you breach that duty then you may be prevented from being a director.
There is a lot more expense involved in running a limited company, for example you must file statutory accounts (abreviated with companies house, full with HMRC), a CT600 for the company, self assessment for the director, annual return for the company with companies house.
So, for starters your accountants fee's are likely to be at least two to three times as much as being self employed.
Now onto tax.
As an employee of a company you pay tax and NI as an employee on the salary that you take. The company also pays employers NI contriutions so, you pay 12% class 1 employee and 13.8% class 1 employer. 25.8% NI is a fair whack so people use dividends which are not employment income so no NI is payable on them (but similarly they do not count towards your pension entitlement which is why people also take a salary).
Now, dividends don't actually avoid tax as they are only payable from profits where salary is payable regardless of profit (and actually reduces profits as its an expense).
To receive a dividend from profits that means that 20% tax will already have been paid on that money.
The money that you receive comes with a notional tax credit so, if say you receive £900 in dividends that is recorded that you have received £1000 in dividends as the amount will be grossed up by the notional credit. However, even though the company does not pay accross the notional credit in the tax retur the notional credit is taken as tax already paid.
What is changing for small companies (there is a petition organised by Frauke against it) is around the notional credit element losing its advantage for tax purposes. But, there is still the reduction in NI over taking the amount as salary.
Conversely the self employed pay class 2 nd class 4 contributions which are nowwhere near as onerous as class 1 employee and employer contributions.
Generally people are a little better off through a company which is small compensation for the additional responsibilities that come with it. The difference in take home is not as large as many think that it will be largely because Class 1 employer and dividends only available from taxed profit comes as a bit of a surprise.
How much tax you pay when you dispose of a company varies dependant upon many factors. If you intend to do that then inform your accountant more than a year before you do (unless we are talking about a crash and burn exit type scenario) so that they are able to look at tax planning scenarios to minimise your liabilities.
You will be best talking to your businesses accountant about how best to progress for your specific circumstances.
Kindest regards,
Shaun.
p.s. Accountants spend ten years plus putting themselves in a situation where they have the ability to offer that sort of advice, its not the sort of thing that one could give a simple generic answer to in a forum post. Also, you cannot plan now based on todays tax laws and fiancial reporting standards for a scenario several years distant so any exit planning strategy would be flawed.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Just to add to the above to remember that any profession / contract that falls foul of IR35 legislation has very restricted access to dividends (i.e. the remainder of the 5% of turnover allowed for running a company (intentded for accountants fee's, etc. so basically, not a lot left for dividends).
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Setting up a Ltd Co to save tax isn't really going to be a great advantage anymore. From April next year dividends will be taxed at 7.5% basic rate, although the first £5000 will be tax free. This more or less removes the advantage Shaun mentions of saving on NI contributions. Also from April, sole directors with no employees will not be able to claim the employers NI allowance.
On the bright side, corporation tax is coming down to 19% in April 2017 and 18% in April 2018, so there will be a slight benefit for profitable businesses.
Being a Director of a Ltd Company will still be more beneficial tax wise, but the gap between Director and Sole Trader will be a lot narrower.
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
think that we need to just emphasise here what the change is as at first glance the rate is currently 10% and the rate will be 7.5% so sure that he's now scratching his head wondering how that can make him worse off.
The answer of course is that the 10% is notional where the 7.5% is real so its losing the tax credit element of the current system.
Also worth noting that the £5k is part of the Basic Rate Band, it doesn't extend it.
Its a bit late now but I'll have a play around with some figures in the morning (or when I get chance tomorrow) to show the differences of dividends under the new system over salary when taking employee's and employers NI into account. (ooh, fun, I get to play with Excel .... But nobodies paying me for it ).
Night matey, talk tomorrow,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Ok, I've been through all of the scenarios based on paying the maximum salary without paying tax or NI with the balance up to the maximum at basic rate.
I would probably confuse people laying out pages of Excel Formulae so for starters I'll begin with conclusions.
The scenario used was :
Current Personal Allowance £10,600 Basic rate : £31,785 NI Primary Threshold : £8,060
Scenario 1 : Salary of £8,060 and dividends of £30,892.50. Scenario 2 : Salary only of £42,385
(both scenarios equate to £31785 taxable)
Now, first I compared directly the situation now with 10% tax and notional tax credits to exactly the same tax and NI rates but using the £5000 / 7.5%. In both instances I ignored the £2000 NI allowance as thats being removed for small companies.
Although the figures differ there are constants :
1) The taxpayer is better off taking the dividends & salary rather than pure salary 2) Overall the costs the company more money to pay dividends than it does to pay salary
Taking the two scenarios using the current rates we have
Using the old method (without the Dividend Allowance) :
Total cost to the business Salary and Dividend : £47,533.75 Total Cost to the Business Salary only : £47,121.85 Using dividends costs the company £411.90 more
Take home pay using Salary & Dividends : £38,952.50 Take home pay using Salary only : £31,909.00 Using Dividends makes the taxpayer better off by £7043.50
Total Tax & NI payable by the company using Salary & Dividends : £8581.25 Total Tax & NI payable by the company using Salary Only : £15,212.85 The company pays more tax using salary only to the tune of : £6,631.60
Conclusion : Dividends are substantially better for the tax payer and only marginally worse for the company.
Now lets use the same figures but with the new method of calculating dividends
Total cost to the business Salary and Dividend : £48.391.88 Total Cost to the Business Salary only : £47,121.85 Using dividends costs the company £1270.03 more
Take home pay using Salary & Dividends : £37,801.75 Take home pay using Salary only : £31,909.00 Using Dividends makes the taxpayer better off by £5892.75
Total Tax & NI payable by the company using Salary & Dividends : £10590.13 Total Tax & NI payable by the company using Salary Only : £15,212.85 The company pays more tax using salary only to the tune of : £4,622.73 by using salary
Conclusion : Dividends remain substantially better for the tax payer but the difference is narrowed. Take home for the taxpayer in this like for like comparrison is £1,150.75 less whilst the cost to the company is £858.13 more.
Now lets take this a stage further and use the actual tax data for 2016/17 in the calculation.
The data now being used is :
Current Personal Allowance £11,000 Basic rate : £32,000 NI Primary Threshold : £8,164
Scenario 1 : Salary of £8,164 and dividends of £32,223.30. Scenario 2 : Salary only of £43,000
(both scenarios equate to £32,000 taxable)
So, putting the above figures through the formulae we get :
Total cost to the business Salary and Dividend : £49,096.30 Total Cost to the Business Salary only : £47,807.37 Using dividends costs the company £1288.93 more
Take home pay using Salary & Dividends : £38,362.30 Take home pay using Salary only : £32,419.68 Using Dividends makes the taxpayer better off by £5942.62
Total Tax & NI payable by the company using Salary & Dividends : £10,734.00 Total Tax & NI payable by the company using Salary Only : £15,387.69 The company pays more tax using salary only to the tune of : £4,653.69 by using salary
Final Conclusion : Continue to use dividends & salary. You will be worse off than at present (personal take home 16.34%(#1) worse off) but you are still 15.59% (#1) better off using dividend/salary combinations than using salary only. (as opposed to 18.08% (#1) better off using the current method).
HTH,
Shaun.
p.s. the above comes from rough workings and is meant as indicative rather than conclusive.
#1 using the figures used in this scenario
-- Edited by Shamus on Monday 7th of September 2015 12:57:03 PM
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
all other taxes being equal to present in the above scenario it would take corporation tax to come down to 17% for the company to be better off paying dividends rather than salary.... But of course owner/employee company directors opinions will be out of step with their fiduciary duty of care in that the directors themselves are substantially better off using dividends even though the company is worse off.
Thats an interesting theoretical point. In that scenario the directors is not working in the best interests of the company so could they not hypathetically be removed from office for that?
Not going to happen but its just a small example of where the directors interests can be out of step with their duty of care.
Also, as evidenced above the new approach chips away at, but does not remove the advantage for the taxpayer of dividends over NI.
all the best,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
p.s. Accountants spend ten years plus putting themselves in a situation where they have the ability to offer that sort of advice, its not the sort of thing that one could give a simple generic answer to in a forum post. Also, you cannot plan now based on todays tax laws and financial reporting standards for a scenario several years distant so any exit planning strategy would be flawed.
Well said!
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
Setting up a Ltd Co to save tax isn't really going to be a great advantage anymore. From April next year dividends will be taxed at 7.5% basic rate, although the first £5000 will be tax free. This more or less removes the advantage Shaun mentions of saving on NI contributions. Also from April, sole directors with no employees will not be able to claim the employers NI allowance.
On the bright side, corporation tax is coming down to 19% in April 2017 and 18% in April 2018, so there will be a slight benefit for profitable businesses.
Being a Director of a Ltd Company will still be more beneficial tax wise, but the gap between Director and Sole Trader will be a lot narrower.
Interestingly I have seen some commentary that 'its not much to pay in tax' from various sources. I think people have very short memories. VAT started off as a relatively low figure and look where we are now. Lets face it that is never likely to be dropped back down! Its the thin edge of the wedge and why more signatures are needed on the petition.
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
The self assessment for the director presumably only has to be completed if / when the director starts taking an income by either salary or dividends? Or is there a nil return type set up.
Oh Jay - never presume when it comes to Accounting This is why Accountants take so long to train. This is a divisive issue - have a look at this Ive seen on Aweb before......http://www.accountingweb.co.uk/anyanswers/question/should-director-register-self-assessment
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
Thanks for the advice and the link. The upshot of the thread seems to suggest that its not necessary to register for self assessment as currently I am not drawing a salary and or dividends and it will be sometime before the company is profitable.
.... But nobodies paying me for it 
).
Well said!
This is why Accountants take so long to train. This is a divisive issue - have a look at this Ive seen on Aweb before......http://www.accountingweb.co.uk/anyanswers/question/should-director-register-self-assessment
