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Salary vs dividends - have i got this right?

Hi - would really appreciate a bit of short sage advice please, - I know that some of you are likely to say that I should go and see a professional, and I will, but, I'd just like to get a feeling for if I am already in the wrong, and what the suggested route would be.

I have a ltd co, of which I am the sole director.   Income is sporadic, and tends to come in lump sums.  Thus far I have withdrawn about 70% of the income received on the basis that I would claim this as a dividend, - and these payouts have been irregular in both timings and amounts.

I also have a paid, separate, employment that utilises my personal allowance and puts me in the higher PAYE tax bracket.

What would be the general recommended course of action?  Of course I would like to minimise, legally, my tax liability.  Should I start paying a salary from my ltd co, but that would obviously attract EE/Eer NI, and PAYE at 40%, which seems inefficient.  Can I withdraw the money from the business, and declare the dividend in one go at the end of the year, or should I declare a dividend every time I draw money?   the business is being run on a very prudent basis, and will declare sufficient profits to cover the dividends drawn (only asset in the business is a £800 laptop), and I presume this falls into the annual investment allowance and therefore 100% writedown in year 1?

Any thoughts appreciated

Steve

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10th Aug 2012 12:18

Salry vs Dividends

"Go and see a professional" is the correct answer.  Basecd on what you've told us 'it depends' is all we can suggest.  There may be other factors that we don't at this stage know.

Bear in mind also that a dividend is illegal unless - at the very least - it is properly the subject of a Directors resolution before payment is made.

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10th Aug 2012 12:21

Yes

You need an accountant.  But I would highly recommend this thread:

http://www.accountingweb.co.uk/anyanswers/question/limited-company-tax-return-issue

Which touches on a lot of the same issues.

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By dreamcatcher
10th Aug 2012 12:37

What I would usually suggest in these situations is do you really need the additional income from your limited company given you already have a separate paid employment. If not consider employer pension contributions from the limited company.  You get the money out of the limited company and the company gets the tax deduction against corporation tax.

However as you have already drawn the money a course of action has been pretty much put in motion so as you point out you are probably looking at either salary or dividends.  Salary will more than like not be efficient due to higher rate tax (40% or 50%) and NIC.  So on the face of it dividends do sound like the best option here.

Depending on your total income any dividend income will be taxed at either 32.5% or 42.5% less the 10% tax credit.

Points to watch with dividends is to make sure that you get the paperwork right, ie dividend vouchers, minutes etc.

Depending how much money you have already drawn from the company and the timing of when the dividends were voted then you could potentially have an overdrawn directors loan account.  Also watch out for S419 tax.

You really do need to seek some professional advice to make sure that you are on the right path.

With regard to the laptop then yes this would attract AIA in the accounting year of purchase. 

 

 

 

 

 

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By JAADAMS
10th Aug 2012 13:42

Dividends article

davegibson00 and  dreamcatcher are right - there is a lot more to the paperwork etc for dividends than just calling a payment a dividend.

This is all detailed in the article: Dividends Checklist - Get the Details Right

http://www.accountingweb.co.uk/topic/tax/dividends-checklist-get-details-right/470525 

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