- Location
- Lincolnshire
But pension payment earns 20 % on day one.
Pension or property
- Thread starter Grassman
- Start date
- Location
- Scottish Highlands
or more, depending on how your finances are arranged.
If you run a ltd co., then to get £20k (the annual ISA limit) from your company and into your pension would cost the company £20k.
If you wanted to have it in an ISA account it would have to be in your pocket first, so would need you to declare dividends of around £22k-£28k before tax (assuming you're efficient and getting it as a dividend income and depending on your tax rate).
What's more, dividends are declared after corporation tax, so that would cost the company an extra 19% (to be 25%).
£20k into a pension for £20k of company funds or £20k into an ISA for £29k of them.
Which would you prefer?
Twisting the figures, IF they still have a student loan they are paying back if they earn 100,000 or 125,000 and pension contributions are taken on both amounts so they are making it look worse, the bit they lose is the loss of the personal allowance but this effects everyone earning these sums.
Your Marginal Tax Rate - Medics Money
Understand marginal tax rates with this blog post by Tommy from Medics Money.www.medicsmoney.co.uk
83% marginal deductions under certain circumstances, and I don't think that's the worst it gets.
farmerm
Member
- Location
- Shropshire
I think above a fairly modest level income from dividends actually incurs a higher rate of taxation than via PAYE.
Dividends are paid from profits that have already been taxed 19%, soon to be 25% are they not?
These days you only get £2K dividend tax free, after that you get taxed based on your tax band, 8.75%, 33.75% or 39.35%. By my calculator the larger the dividend the greater the real tax rate paid on those company earnings. the only ones who might have a bit of a tax saving on basic rate tax payers who would otherwise pay 20% plus 13% national insurance whilst in the higher rate band it is 40% plus 3.75% NI
Yes the corporation tax is not shown on the individuals tax calculation but it must be factored in when comparing real tax rates paid under different business structures.
Where am I wrong?
| Basic | Higher | Additional | |||||
8.75% | 33.75% | 39.35% | |||||
| Company Profit | Corp tax at 19% | Dividend | Allowance | £1,243 | £4,793 | £5,588 | |
£20,000 | £3,800 | £16,200 | £2,000 | £14,958 | £11,408 | £10,612 | Take away earnings |
25% | 43% | 47% | Real tax rate on company profit | ||||
| Basic | Higher | Additional | |||||
8.75% | 33.75% | 39.35% | |||||
| Company Profit | Corp tax at 25% | Dividend | Allowance | £1,138 | £4,388 | £5,116 | |
£20,000 | £5,000 | £15,000 | £2,000 | £13,863 | £10,613 | £9,885 | Take away earnings |
31% | 47% | 51% | Real tax rate on company profit |
Higher dividend... higher rate of total taxation...
| Basic | Higher | Additional | |||||
8.75% | 33.75% | 39.35% | |||||
| Company Profit | Corp tax at 19% | Dividend | Allowance | £1,951 | £7,526 | £8,775 | |
£30,000 | £5,700 | £24,300 | £2,000 | £22,349 | £16,774 | £15,525 | Take away earnings |
26% | 44% | 48% | Real tax rate on company profit | ||||
| Basic | Higher | Additional | |||||
8.75% | 33.75% | 39.35% | |||||
| Company Profit | Corp tax at 25% | Dividend | Allowance | £1,794 | £6,919 | £8,067 | |
£30,000 | £7,500 | £22,500 | £2,000 | £20,706 | £15,581 | £14,433 | Take away earnings |
31% | 48% | 52% | Real tax rate on company profit |
Is the tax fiddle rather not about taking dividends, on the contary you minimise dividends and instead have the company finance your lifestyle?
- Location
- Scottish Highlands
It's the extreme case, but it's relevant to many of them. The biggest part isn't mentioned or analysed there is the pension trap (which is the bit that will hopefully be sorted tomorrow).
- Location
- Scottish Highlands
I run a Ltd Co, and my tax advisor has been allocating a small salary and larger dividend until now. It saves employee and employer NI and allows things to be optimised, but isn't the massive tax saving scam that many would suggest, although I don't take any company benefits of the sort to 'finance my lifestyle'. It's likely that next year will mean a shift towards larger salary and smaller dividend, to try and avoid the higher corp tax rates - which tells me that the gains from running it are actually fairly marginal.
National insurance tax is what you've missed
Simple question do they have to pay any remaining student loan on ALL pay above 28 grand and pension on all pay ? The only additional tax is the loss of personal allowance, the pension issue from what I read is very specific and iirc effects those on far higher income and presumably effects all at those levels IF they meet that specific criteria
- Location
- Scottish Highlands
No idea - you can google that one for yourself. My student loan is long paid off.
I wouldn't pretend to fully understand the pension issue, and even if I did I couldn't explain it, but it's the biggie that's stopping consultant grades from working full time. As I started this thread revival with, and for the sake of the NHS, I hope that's fixed by the revised limits.
low salary/ high dividend has / is the brst option i’m advised however 25% corp tax will change that i guess
the 19% potential corp tax freeze mentioned in this Sundays Telegraph for sme’s sub 250k profit plus a possible 60k pension contribution will be helpful many small ltd co business owners i think
farmerm
Member
- Location
- Shropshire
I didn’t.
20% plus 13% makes 33% for basic tax, 40% plus 3.75% makes 43.75% for higher rate band.
£20,000 made and paid as a £16,200 dividend comes out as a 26% or 44% tax rate when you account for both dividend tax and corporation tax
If you have 30,000 profit to take from your company you would pay £5700 in corp tax at 19%, leaving £22,300 to pay tax on after the two grand dividends allowance, we agree on that, you then pay 8.75% on the 22,300 which is £1951.25 total tax paid is £7651.25. If you pay yourself via PAYE you pay £6000 income tax plus £ 3900 nat insurance total £9900 making you £2248.75 better off taking the money via dividends, obviously if corp tax rises to £25% the difference will drop to less than £700. But still better off taking dividends
- Location
- Scottish Highlands
Not checking your maths through, but sounds about right. £2248.75 isn’t enough to cover the admin burden of being Ltd, extra accountants fees etc. You’d need to have far more profit than £30k or some other reason (liability avoidance, client insistence etc.) to merit Ltd.
- Location
- Northumberland
I think it’s going to take more than that to fix the NHS unfortunately. I have two close family members who are senior doctors in the NHS. One’s a GP in her later 40s. About to resign her partnership and go back as a salaried GP a couple of days a week because the workload has simply become too great and working life has taken too much of a toll for many years. Not only have GPs been struggling with higher responsibility and workload for years (there simply aren’t quality employees out there to share the workload; when doctors are employed from the B-list, it just creates more work long-term), but these days they also take a lot of abuse from patients who aren’t getting the service they deserve.
The other doctor in my life is a senior hospital doctor who is struggling with their physical and mental health because the demands of the job are so high they spill over into all ‘non-booked’ time outside work and don’t leave them time to enjoy their family. In theory they could be influencing Trust policy etc (as well as doing all the mandatory training consultants must undertake in their own time and feel like they ought to be writing papers to bolster their CVS etc). I can see that doctor taking early retirement in a number of ways
The NHS is fūcked. I can’t encourage those close to me to prop it up any longer.
Hilly
Member
- Location
- Scottish Borders.
Just the way the politicians like it , funnelling the money their way …. Old saying money in bandages , and loads of money in bandages when the government is buying ..I think it’s going to take more than that to fix the NHS unfortunately. I have two close family members who are senior doctors in the NHS. One’s a GP in her later 40s. About to resign her partnership and go back as a salaried GP a couple of days a week because the workload has simply become too great and working life has taken too much of a toll for many years. Not only have GPs been struggling with higher responsibility and workload for years (there simply aren’t quality employees out there to share the workload; when doctors are employed from the B-list, it just creates more work long-term), but these days they also take a lot of abuse from patients who aren’t getting the service they deserve.
The other doctor in my life is a senior hospital doctor who is struggling with their physical and mental health because the demands of the job are so high they spill over into all ‘non-booked’ time outside work and don’t leave them time to enjoy their family. In theory they could be influencing Trust policy etc (as well as doing all the mandatory training consultants must undertake in their own time and feel like they ought to be writing papers to bolster their CVS etc). I can see that doctor taking early retirement in a number of ways
The NHS is fūcked. I can’t encourage those close to me to prop it up any longer.
farmerm
Member
- Location
- Shropshire
Manipulating the division of PAYE and dividends to leverage that anomaly is all well and good for a one man band but when there are multiple shareholders with different commitments to the business...
Quick question, how did you come to £6000 income tax and £3900 NI when taking £30,000 via PAYE? Did you miss the personal allowance?
If the company mans entire income came from £22,300 dividends from the companies £30,000 profit
£22,300 dividends - £2000 dividend allowance -£12,750 personal allowance * basic rate 8.75% = £660 tax on dividends + £5700 corporation tax, total tax paid £6360
Taking the full £30,000 profit out though PAYE avoids corporation tax but adds employer NI contributions.
I think £30,000 would be a £27,350 salary plus £2,650 employer NI contributions. Giving rise to £2,956 income tax and £1,969 employee NI total tax £2650+2956+1969 = £7,485 tax!
In comparison a sole trader
Income tax on £30,000 is £30,000 -£12,750 *20% which is £3,450
NI is £30,000 - £11,909 *9.73% + (52*£3.15) which is £1,923
Total tax on £30,000 profit for a sole trader is £5,373...
The "flaw" that makes taking high dividends low salary more attractive than low dividends high salary is because when you own the company you are employed by you bare the cost of both employee and employer national insurance....
And for interest somebody on a £30,000 salary would pay £5575.80 in tax (with further NI paid by their employer)
So in this situation the self employed individual earning £30K pays about £200 less tax but is not entitled to sick pay, maternity pay, paternity pay......
There is this notion that company structures and earnings via dividends are a great tool for big savings in tax yet in many cases I dont think it is true, certainly not when the company makes £30K.
I think that boat long sailed when dividends became taxable. 
All people using this scheme take the personal allowance amount as PAYE before any dividends so I ignored that part for both calculations.Manipulating the division of PAYE and dividends to leverage that anomaly is all well and good for a one man band but when there are multiple shareholders with different commitments to the business...
Quick question, how did you come to £6000 income tax and £3900 NI when taking £30,000 via PAYE? Did you miss the personal allowance?
If the company mans entire income came from £22,300 dividends from the companies £30,000 profit
£22,300 dividends - £2000 dividend allowance -£12,750 personal allowance * basic rate 8.75% = £660 tax on dividends + £5700 corporation tax, total tax paid £6360
Taking the full £30,000 profit out though PAYE avoids corporation tax but adds employer NI contributions.
I think £30,000 would be a £27,350 salary plus £2,650 employer NI contributions. Giving rise to £2,956 income tax and £1,969 employee NI total tax £2650+2956+1969 = £7,485 tax!
In comparison a sole trader
Income tax on £30,000 is £30,000 -£12,750 *20% which is £3,450
NI is £30,000 - £11,909 *9.73% + (52*£3.15) which is £1,923
Total tax on £30,000 profit for a sole trader is £5,373...
The "flaw" that makes taking high dividends low salary more attractive than low dividends high salary is because when you own the company you are employed by you bare the cost of both employee and employer national insurance....
And for interest somebody on a £30,000 salary would pay £5575.80 in tax (with further NI paid by their employer)
View attachment 1099501
So in this situation the self employed individual earning £30K pays about £200 less tax but is not entitled to sick pay, maternity pay, paternity pay......
There is this notion that company structures and earnings via dividends are a great tool for big savings in tax yet in many cases I dont think it is true, certainly not when the company makes £30K.
- Location
- Scottish Highlands
And the news is in. No drop in CT rate (sorry @Clive ), but a big boost for those wanting to maximise their pension funds - annual limit increased to £60k (from £40k) and a removal of any lifetime allowance.
Not sure how much that will affect many on here, but perhaps will make it more likely to find a GP...
Not sure how much that will affect many on here, but perhaps will make it more likely to find a GP...
farmerm
Member
- Location
- Shropshire
I think we are trying to achieve different things... you are looking at comparing the different tax positions bought about by how profit is allocated out of a company whilst I am comparing the tax position of profits out of a companies against the tax position of earning that money as a sole trader..
There is certainly a point between £30 and £50k in which high dividend low salary saves some tax. I don't think that is the case for income in higher tier?Seems to me the fairer solution would be to treat income form dividends with the same tax regime as regular self employed income ..
£1 dividend
tax calculated on the basis of £1.266 profit
20% income tax 25.3p
plus 9.73% NI 12.23p
total tax 37.53p
credit of corporation tax already paid 19.0p
tax due 18.53p
All is equal, except of course that falls apart because somewhat when government move the corporation tax rate because dividends may not be allocated in the same tax year as the corporation tax was paid....