I've calculated the impact of the budget on Ltd Company Contractors

I've calculated the impact of the budget on Ltd...

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Hi everybody,

I'm probably not the only one who has spent a good chunk of the weekend running the numbers of the budget. What has surprised me is that for a Contractor on a fairly average day rate of £350 it only costs about £1,700 per year. Certainly not good for them but shouldn't cause an immediate rush to self-employment / full time employment.

One element of the calculation that I'm not clear on is whether the dividend allowance and personal allowance overlap. So if you have a salary of £7,000 and dividends of £10,000 would the first £4,000 of dividends fall into the £11,000 personal allowance and then another £5,000 fall into the dividend allowance leaving just £1,000 taxed at 7.5%. OR would you ignore the personal allowance and tax £5,000 of the dividends at 7.5%. Anyone know?

I made a calculator for our clients, feel free to take a look here - http://learn.capricaonline.co.uk/the-financial-impact-of-the-july-2015-b...

Replies (12)

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By Paul Soper
12th Jul 2015 11:56

The dividend deduction comes first but...

Salary of £7,000 plus dividends of (£10,000 - £5,000) - total income £12,000.Liability £1,000 at dividend rate of 7.5% BUT...

If Dividends are also SAVINGS income then there is a further exemption of £1,000 (£500 if a higher rate taxpayer.

So what is the distinction between Savings income and other income?  It used to be significant in the days of the investment income surcharge but has been largely irrelevant since 1984.  We know that Savings Income is the top slice of income, and that dividends are the top slice of that top slice so does the £1,000 exemption apply as well as the £5,000?

We won't know until we came more information.  The lack of information concerning such a fundamental change to our taxation system is, in my opinion nothing short of disgraceful....

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Portia profile image
By Portia Nina Levin
12th Jul 2015 12:02

@ Paul

I think we should probably simply rely on the existing definitions of savings income and dividend income in ITA 2007, sections 18 and 19. To not do so would be folly in my view.

By those definitions, dividends are not savings income, nor vice versa.

The OP has taken a very well balanced view, in my opinion.

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Glenn Martin
By Glenn Martin
12th Jul 2015 12:09

What's people's views on cars.
As the gap between self employed and one man company has narrowed quite a bit, clients will be obviously looking at wether it worth carrying on with the company. (Another thing clients will consider is the £500 they can save on an accountant if they ditch the company).
I currently lease a car and charge mileage into my company at 45p per mile. If someone wanted a decent car it maybe worthwhile doing it as a sole trader claim all the costs (adjust for private use) and it may be more beneficial. It's difficult to advise on though as everyone has their own view on cars and whether they are leased/owned etc.

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By Paul Soper
12th Jul 2015 12:18

Oops!

Well spotted Portia! Sunday morning hangover I fear...

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By kevin.robins
12th Jul 2015 12:54

Dividend income

The £1,000 savings allowance only applies to interest as shown here:-

https://www.gov.uk/government/uploads/system/uploads/attachment_data/fil...

However it is still not clear to me if this means only bank/building society interest or whether it applies to all forms of interest?

 

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By thomas34
12th Jul 2015 18:46

To the OP

I asked the same question under Rebecca's tax article as yet without a response.

Setting aside the semantics of dividend and savings, Paul's take on the subject is that the "tax free" element of the dividends is extended to mop up unused allowances. I'm not sure in the example why total earnings are £12K and not £17K but his answer I hope is correct. 

 

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By mumpin
12th Jul 2015 20:41

Thanks for that...

I've run similar calculations:

I've gone for salary of £8196 to pay a bit of NIC's and show on the radar for State Pension entitlement.

On annual income of £75k I get take home of £54,321 (your calculator says £55,315).

For £100k I get take home of £67,990 (you have £69,166).

What Corp Tax rate are you using?

Difficult be confident without seeing worked examples...

 

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By SE_Confused
12th Jul 2015 21:45

Let'snot forget the payment on account when we present this to clients - it will increase as more dividends are taxed.

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By thomas34
13th Jul 2015 07:57

Agreed

All our personal service company clients should start saving for 31 January 2018 when some of them will have one hell of a tax bill.

 

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By Tkwhitehouse
13th Jul 2015 09:00

@mumpin - Are you including an FRS profit? My calculations had one of those based on a 14.5% FRS rate which might explain the difference?

Thanks everyone for confirming the dividend/pa overlap. Hopefully we're all correct and it won't mean waste personal allowances.

The POA is a good point that I need to amend my page for.

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By Mister E
13th Jul 2015 09:55

My take

I have taken the view the £5k will sit on top of the PA.

So if all divs say £20,000 taken.

£20,000 is taxed - no longer gross up. £20,000 less £11,000 PA less £5,000 div 'allowance' = £4k taxable at 7.5%

Seeing more income sources with their own allowance and rates.  Can we have a rate for pension income as well and then scrap NIC and make the BR 30%, ish....! Simples ;)

 

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By MBK
13th Jul 2015 13:01

Why not wait for Wednesday ..

... when we'll have the draft legislation which will no doubt make it clear exactly how it is going to be taxed!

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