# Corp tax increase and div / salary trade-off

Comparing dividend with salary in basic rate band

• ### HMRC performance report 2023-24

I have spent half the week trying to work out whether, for a basic rate taxpayer, they should take a salary or dividends in view of the corporation tax hike and also taking into account their specific circumstances, but I am going round in circles. I don't want someone to do the calculation for me - but would greatly appreciate a starting point, as I have done a huge number of calculations now, and am still no closer to finding the "right" answer!

Client company has two directors - husband (Director A) and wife (Director B). Director B has the higher shareholding. She has £30,000 left of her basic rate tax band for 2023-24 after some income from another employment, a small pension and a small amount of dividend income taken so far this tax year from the company. Director A has already exceeded the higher rate tax threshold with pension, dividend income and employment income from elsewhere.

The directors would like Director B to utilise her full basic rate tax band for 2023-24. There is £30k left to use, and they want to know whether it should be taken as dividend, salary or a combination of the two. Neither director currently takes a salary from the limited company as both have income from elsewhere fully utilising their tax allowances, and sufficient to give them a full year of NI credits elsewhere. They have previously just taken dividends from the company.

The company expects profits of around £100k in 2023-24, so will suffer the 26.5% marginal rate of corporation tax.

My thoughts are that:

£9,100 salary should be taken by Director B. No point taking more than this as the employment allowance is not available - as it would not be tax efficient for Director A to take a salary (already in higher rate tax band from other employment and pension income). Although Director A will pay 20% tax on the salary, it saves corporation tax at the marginal rate of 26.5%. No NI as under primary threshold. Clearly more tax efficient to take this level of salary.

£20,900 dividend could then be taken by Director B (Director A would receive a dividend of their respective shareholding). Tax paid at 8.75% in basic rate band. However, Director A will have to pay tax at higher rate on his share of the full dividend payment.

So on balance, I think it will be best for Director B to take the full £30,000 as salary. This doesn't require Director A to take any dividend income, which would unnecessarily push him into the higher rate tax band.  Although the employment allowance would be available if both directors took a higher salary, again this would be taxable on Director B at higher rate, which is not tax efficient just to save the employer's NI on both salaries.

So I *think* I know what the right answer is, but don't have a clue how to actually calculate this - there are just so many variables involved, and the interplay with Director A makes the situation even more complicated.

Any ideas of how I can show this to my client in an easy-to-understand numerical format to show the tax effect of each option, would be much appreciated!

### Replies (45)

By lionofludesch
22nd Jun 2023 23:05

The secret of this calculation is to trace where the marginal rates change.

There can be a surprising number of thresholds.

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By Not Anonymous
22nd Jun 2023 23:47

"Although Director A will pay 20% tax on the salary"

I was lost there. And here.

"This doesn't require Director A to take any dividend income, which would unnecessarily push him into the higher rate tax band"

Why would it push him into the higher rate band when you previously said,

"Director A has already exceeded the higher rate tax threshold with pension, dividend income and employment income from elsewhere"?

Thanks (1)
By Hugo Fair
23rd Jun 2023 00:32

Same two 'anomalies' that jumped out at me on a skim read:
* I presume the first is a typo and should refer to Director B?
* And that the second is sloppy wording that should say "which would unnecessarily be taxed at his higher rate tax band"?

My solution would be to build a series of simple spreadsheets (one for each of the payment types) to make sure I'd got the formulae right ... and then either combine them (prettier but hard) or link them (less elegant but easier).
You can then demonstrate the impact of any permutation (aka flex the data) ... so long of course that your client believes that a spreadsheet is reliable!
[Oh and once they've chosen their values, I'd always double-check by running the calcs as if for a real return].

This is why, despite enjoying building models, I would never personally offer this service to a client ... too much effort and too high a cost, usually for a relatively not significant result (especially if thresholds/rates then change - which with the febrile state of current politics is highly likely)!

Thanks (4)
By sparkler
23rd Jun 2023 07:22

Apologies for typo - too late to edit unfortunately. I did indeed mean
* Director B would pay 20% tax on salary
and *a dividend paid to Director A would unnecessarily be taxed at higher rate, given that he is already in the higher rate tax band.

You're right that it's a lot of effort - but it doesn't seem unreasonable for my client to ask me whether it would be better for them to take a dividend or salary. It's something I have usually managed to do fairly easily - there are just a lot of variables in this particular case!

Thanks (1)
By I'msorryIhaven'taclue
23rd Jun 2023 09:48

I'd started cobbling together a financial model for this along Hugo's lines, but found a good many variables needed integrating (so relegated the worksheet to my laptop in readiness for Mrs I'msorry's relatives' next visit).

There are the obvious variables: taxable profits, directors' salaries (including their affect on taxable profits), & dividends (within varying thresholds). And of course the number of associated companies, for CT rate banding purposes. Then a few potential variables such as EA and perhaps IR35.

I became bogged down with the question of just how to calculate the optimum mix (of salaries and divs). I faintly recall being set similar questions in "Cost and Management Accounting": How many of Widgets A, B & C should a factory produce to optimise its profits? Some examinees used substitution to arrive at the optimum numbers of widgets; others used simultaneous equations to crack the algebra. I can't see substitution working well for divs & salaries optimum mix - maybe a graph would do the trick, if "all" possible combinations were plotted to it.

Thanks (1)
By frankfx
23rd Jun 2023 07:58

Can A gift shares to wife B, tax effiently?

nothing to prevent company salary if justified.
Salary i avoids dividend tax on that marginal amount.

can meaningful pension contributions be paid and justified for tax relief?
This too avoids dividend tax on extracted monies
to be fully enjoyed later with potential for investment growth.

Pension tax free lump sum could be realised for personal spending.

Is the company year end tax efficient for participator loans?
Assuming A and B want to enjoy use of cash for a block of time.

Thanks (1)
By taxdigital
23rd Jun 2023 08:41

Try this - do check the numbers for accuracy:

Salary route:

Company
CT saved on salary - £30000 x 26.50% = £7,950 (a)
No employer NI assuming employment allowance available

Personal
Income tax – £17,430 x 20% = £3,486 (b)
NI - £17,430 x 12% = £2,092 (c)

Total tax impact – a+b+c = Tax saved £2,372

Dividend route:

Company
CT saved on salary £9,100 x 26.5% = £2,411
CT before dividend payment - £20,900/73.5% x 26.50% = £7,535
Net CT liability = £5,124 (a)

Personal:
Income tax - wife on 50% of the div -£10,450 – (£12570-£9100) - £1000 = £5,980 x 8.75%=£523
Income tax - husband on 50% of the div - £9,450 x 33.75%=£3,189
Total - £3,712 (b)

Total tax impact – a+b = £8,836

Check if husband could waive his rights to receive the dividend.

Thanks (1)
By frankfx
23rd Jun 2023 09:08

taxdigital wrote:

Try this - do check the numbers for accuracy:

Salary route:

Company
CT saved on salary - £30000 x 26.50% = £7,950 (a)
No employer NI assuming employment allowance available

Personal
Income tax – £17,430 x 20% = £3,486 (b)
NI - £17,430 x 12% = £2,092 (c)

Total tax impact – a+b+c = Tax saved £2,372

Dividend route:

Company
CT saved on salary £9,100 x 26.5% = £2,411
CT before dividend payment - £20,900/73.5% x 26.50% = £7,535
Net CT liability = £5,124 (a)

Personal:
Income tax - wife on 50% of the div -£10,450 – (£12570-£9100) - £1000 = £5,980 x 8.75%=£523
Income tax - husband on 50% of the div - £9,450 x 33.75%=£3,189
Total - £3,712 (b)

Total tax impact – a+b = £8,836

Check if husband could waive his rights to receive the dividend.

Dividend Waiver

To be effective do you need a Deed?
prepared by Solicitor, a reserved Activity Legal Service Act
There is no consideration
here between A and B

Thanks (1)
By I'msorryIhaven'taclue
23rd Jun 2023 09:53

Is consideration necessary for a deed to be effective?

My understanding, when last I came across the matter a dozen years ago, that anyone can prepare a deed nowadays. And that the document is simply headed "Deed" in order for it to be a deed. Yes indeedy - no wax, seal or solicitor necessary. (I'd be happy to be corrected if wrong).

Thanks (1)
By frankfx
23rd Jun 2023 10:47

I&#039;msorryIhaven&#039;taclue wrote:

Is consideration necessary for a deed to be effective?

My understanding, when last I came across the matter a dozen years ago, that anyone can prepare a deed nowadays. And that the document is simply headed "Deed" in order for it to be a deed. Yes indeedy - no wax, seal or solicitor necessary. (I'd be happy to be corrected if wrong).

article by Brabners Solicitors

https://lancashare.co.uk/news/dividend-waivers-who-can-prepare-them#:~:t...

Thanks (1)
By I'msorryIhaven'taclue
23rd Jun 2023 11:16

Wow, since the Legal Services Act 2007. It's evidently more than a dozen years since I last was involved in a deed preparation. Time flies.

Good link, and really useful to know that Accountants cannot execute a deed. But what it omits to point out is that a company iteslf can execute a deed.

https://www.michelmores.com/agriculture-insight/learning-law-execution-d...
Company
In accordance with the Companies Act 2006, companies can execute deeds:-

· Under their common seal (if they have one), by affixing the seal to the document in the presence of the company secretary and a director, or two directors, who will need to sign the Deed. The signatures do not need to be witnessed; or

· By two company directors or one director and the company secretary, who need to sign the Deed. The signatures do not need to be witnessed; or

· By one director in the presence of a witness – in which case the director signs in their capacity as director, but otherwise as described for individual signatories above.

In each case, where a Deed is being executed by a company, the execution clause will read “Executed as a Deed by [Company name] acting by…”

I wonder whether an accountant or similar is permitted to "assist" the directors in preparing a deed for a company to execute?

Thanks (1)
By Paul Crowley
01st Mar 2024 17:48

Bit of a scare tactic
It is all about fees. Only legal types can get paid for reserved services.

Thanks (0)
By frankfx
23rd Jun 2023 09:27

Dividend Waivers
Risk awareness

Tax Case
Donovan and Maclaren v hmrc 2014 UKFTT 048 TC

A tax saving motive or arrangement rather than commercial benefit to company, cited

Thanks (1)
By I'msorryIhaven'taclue
23rd Jun 2023 10:00

That I suppose is the other variable for a financial model - varying share percentages and/or waiving divs. Otherwise you'll have a client pooh-pooh your model and coming up with his own cunning version of the optimum mix. For others there may be a variable of adding a spouse to payroll.

Thanks (1)
By rmillaree
23rd Jun 2023 09:50

To me its seems the previous starting point is wasting tax - if you are starting from a point that isnt tax efficient i would recommend doing the obvious things first to not pay unecessary tax - before you crunch the numbers for more complicated scenarious. Note i am aware in some respets you are takingb that action now
Apologies if i am missing something here - its possible as there are plenty of moving parts.

" Neither director currently takes a salary from the limited company as both have income from elsewhere fully utilising their tax allowances, and sufficient to give them a full year of NI credits elsewhere. They have previously just taken dividends from the company."

Why would they have been be in that position previously?

9.1k profit
at present director B extracts as dividend

Ignoring changes to corp tax

9.1k profit 19% corp tax = 1729 corp tax - 7371 divi - 645 divi tax = 6726 in pocket

or take 9100 salary - 1820 br tax = 7280 nyt - no corp tax

so ignoring increase in corp tax - salary was alwasys the more beneficial route. I am presuming this individual is not wsating their 1k dividend allowance.

In summary i am puzzled as to why you are only now looking at the salary option. For companies paying corp tax and invividuals taking divis salary has pretty much always been a no brainer unless there is a specific reason not to.
Thats without even factoring in the elephant of perhaps missed maternity pay freebies.

Thanks (2)
By taxdigital
23rd Jun 2023 10:19

rmillaree wrote:

" Neither director currently takes a salary from the limited company as both have income from elsewhere fully utilising their tax allowances, and sufficient to give them a full year of NI credits elsewhere. They have previously just taken dividends from the company."

.

I missed that part as it was quite a long OP. Even if you take the PA out of the equation, the salary route is still advisable. This is simply because a BR taxpayer will be paying only 32%-26.5= 5.5% net tax, whereas the dividend route means CT26.5%+ div tax.

Edited.

Thanks (1)
By rmillaree
23rd Jun 2023 11:41

I think you are getting confused here - that text you copied was the op's statement i was referring to - i was making the same point you are making - salary no brainer. My puzzlement was why salary wasnt already in place before client was looking at calcs for new higher rate of copr tax.

Thanks (1)
By lionofludesch
23rd Jun 2023 12:02

rmillaree wrote:

I think you are getting confused here - that text you copied was the op's statement i was referring to - i was making the same point you are making - salary no brainer. My puzzlement was why salary wasnt already in place before client was looking at calcs for new higher rate of copr tax.

Does secondary Class 1 not tip the scales the other way ?

Thanks (2)
By I'msorryIhaven'taclue
23rd Jun 2023 13:04

You'd expect so, wouldn't you! Yet according to Taxdigital's workings it'd still be a no-brainer to take a salary. viz:

taxdigital wrote:

I missed that part as it was quite a long OP. Even if you take the PA out of the equation, the salary route is still advisable. This is simply because a BR taxpayer will be paying only 32%-26.5= 5.5% net tax, whereas the dividend route means CT26.5%+ div tax.

There's an element of double-counting in your percentages, Taxdigital. Let's strip it right back to £100 profit rather than use percentages:

Case 1: Salary

Company taxable profits £100

minus Director's salary -£100

Taxable profit £0

Taxes payable by director £32 (your 32% figure, being 20% IT & 12% EE NI)

Total taxes payable £32

Case 2: Divs

Company taxable profits £100

minus Director's salary -£0

Taxable profit £100

Corp Tax payable by Company £26.50 (at your 26.5% incremental rate)

Div tax payable by director £8.50

Total taxes payable £35

So there's not a lot in it: £32 versus £35

Back to your ER NI, Lion. That would certainly tip the scales now.

Thanks (1)
By lionofludesch
23rd Jun 2023 13:39

I make your dividend tax £6.43, being 8¾% of the after tax profit of £73.50.

Which makes it £32 v £33.

Before secondary NIC.

It's still dividends for me.

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By I'msorryIhaven'taclue
23rd Jun 2023 14:48

lionofludesch wrote:

I make your dividend tax £6.43, being 8¾% of the after tax profit of £73.50.

Which makes it £32 v £33.

Good spot!

So there's even less in it.

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By Paul Crowley
01st Mar 2024 17:53

agree

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By taxdigital
23rd Jun 2023 13:56

I&#039;msorryIhaven&#039;taclue wrote:

You'd expect so, wouldn't you! Yet according to Taxdigital's workings it'd still be a no-brainer to take a salary. viz:

Yes, there is a double count as CT effectively gets replaced by IT. Some exercise for the mind on a sunny Friday.

Here is v2 with all the information so far factored in:

Assumptions:
1. No PA available
2. Employment allowance available
3. Wife within BR band
4. Husband within HR

Salary route:

Company

CT on £30,000 replaced by income tax on salary paid by the director.
No employer NI

Personal
Income tax – £30,000 x 20% = £6,000 (a)
NI - £17,430 x 12% = £2,092 (b)

Total tax impact – a+b = £8,092
Net cash in hand - £21,908

Dividend route:

Company
CT on £9,100 replaced by personal income tax on salary.
CT before dividend payment - £20,900 x 26.50% = £5,538 (a)

Personal:
Income – wife on salary of £9,100 x 20% = £1,820
Income tax - wife on 50% of the div – £7,681(£20000-£5538/2) – £1000 = £6,681 x 8.75%=£585
Income tax - husband on 50% of the div - £6,681 x 33.75%=£2,255
Total - £4,660 (b)

Total tax impact – a+b = £10,198

Cash in hand - £19,802. Still salary wins!

Taking £100 may not be comparable in the real world.

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By sparkler
23rd Jun 2023 14:00

Just to add in (I haven't reviewed the calcs in detail as yet) I think it is unlikely that Employment Allowance would be available. In a 2 director company, both directors need to earn over £9,100 in order to claim EA (there are no other employees). This would require Director A to take a salary taxed at 40% simply to allow the company to claim EA - this doesn't sound like it will work out to be a tax efficient solution.

Thanks (1)
By I'msorryIhaven'taclue
23rd Jun 2023 14:54

taxdigital wrote:

Taking £100 may not be comparable in the real world.

It just seemed clearer than working in percentages.

I haven't been over your figures, but Lion's post highlighted a flaw in my div tax calc that now narrows the gap to £32 per £100 versus £33 per £100

Your numbers aren't in that 32:33 ratio, but I shall leave it to Lion to go over them as yours truly is struggling to meet a deadline.

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By taxdigital
23rd Jun 2023 10:13

frankfx wrote:

Dividend Waiver

To be effective do you need a Deed?
prepared by Solicitor, a reserved Activity Legal Service Act

frankfx wrote:

There is no consideration
here between A and B

Effectively it serves as an instruction to the company. Nothing to do with consideration.

This is unlikely of any relevance to the OP though.

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By johnthegood
23rd Jun 2023 13:21

I am not clear - how much do they intend drawing out of the company? Just the 30k and leave the rest in? Whats the plan for the rest? Are they trying to avoid HR tax completely?

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By sparkler
23rd Jun 2023 13:32

Yes, currently only intending to draw out up to HR threshold. The rest is left in the company, for which I believe their current intentions are to liquidate at some suitable point in the future and claim BADR (both directors in their 50s, so beyond the age at which potential maternity benefits would be considered).

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By johnthegood
24th Jun 2023 06:37

sparkler wrote:

Yes, currently only intending to draw out up to HR threshold. The rest is left in the company, for which I believe their current intentions are to liquidate at some suitable point in the future and claim BADR (both directors in their 50s, so beyond the age at which potential maternity benefits would be considered).

In that case the two big factors for me are a) is EA available as that makes all the difference in salary v dividends and b) can we waive dividends or use alphabet shares for the higher earner as again that swings the calculation in a different direction.

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By lionofludesch
23rd Jun 2023 13:42

johnthegood wrote:

I am not clear - how much do they intend drawing out of the company? Just the 30k and leave the rest in? Whats the plan for the rest? Are they trying to avoid HR tax completely?

Ah - that's the problem with these hypothetical problems. Chances are that the shareholders won't draw out every last penny of profit, which reduces the dividend tax payable - albeit storing up a latent liability for a later year.

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By sparkler
23rd Jun 2023 13:35

Thank you VERY much to everyone who has posted such helpful and detailed replies on this question. I do find, as a sole practitioner, that I sometimes end up going round in circles, and this forum is very valuable to bounce ideas off. I'm going to have a detailed read through the comments now and put together some calculations myself.

Thanks (2)
By Geoff56
23rd Jun 2023 14:49

"I do find, as a sole practitioner, that I sometimes end up going round in circles"

Yup; I'm with you on that one.

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By sparkler
24th Jun 2023 07:51

Thanks again, all. I have carried out my own calculations using the precise circumstances of my clients (exact amount of basic rate band available for Director B; exact shareholdings) using the "£100" examples, which I really like as they are such a clear way of demonstrating the tax effect of any particular action between marginal tax thresholds.

EA will not be available as funding it will cost more in higher rate tax (Director A) than it will save overall.

My calculations have shown that a £12,570 salary is the most tax efficient for Director B. This is the £9,100 "no brainer" salary, plus an additional top up to the Primary Threshold - Employers NI will be payable on this small portion but not Employees NI, which tips the balance in favour of salary here.

Once Employers NI and Employees NI are payable on salary over £12,570, a dividend becomes the more tax efficient route, even taking into account the higher rate tax that Director A will take on his portion of the dividend.

Of course, dividend waivers and alphabet shares are a further potential consideration, - knowing the client, I think they'll be happy to stick with a simple route, but we shall see!

Thanks again for all of the interesting, well thought out comments - I'm no longer going round in circles and have every confidence that I can demonstrate the different options to my client in a clear and meaningful way.

Thanks (1)
By taxdigital
24th Jun 2023 08:20

You’re welcome to bring all your questions back on here and we’ll, working together, fix them all!

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By I'msorryIhaven'taclue
24th Jun 2023 08:40

sparkler wrote:

I have carried out my own calculations.... using the "£100" examples, which I really like as they are such a clear way of demonstrating the tax effect of any particular action between marginal tax thresholds.

I prefer to use £100 rather than percentages. Try lopping off the pound sign and adding a % symbol, and most clients will glaze over. They all understand cash, but not all of them can think in percentages.

Have you taken on board Lion's amendments to my figures? I'd (erroneously) calculated divs tax on the full £100 of pre-tax profit; whereas the (8.75%) rate should of course have been applied to the post-tax retained (£63.50) profits. My bad!

sparkler wrote:

My calculations have shown that a £12,570 salary is the most tax efficient for Director B. This is the £9,100 "no brainer" salary, plus an additional top up to the Primary Threshold - Employers NI will be payable on this small portion but not Employees NI, which tips the balance in favour of salary here.

Other way around? "Employee's NI will be payable on this small portion but not Employer's NI." Which could open the door to higher than £12,570 salaries IF EA is applicable.

sparkler wrote:

EA will not be available as funding it will cost more in higher rate tax (Director A) than it will save overall.

https://www.gov.uk/claim-employment-allowance/eligibility

Under the "Who Cannot Claim Employment Allowance[?]" section (near to bottom of page) two qualifying conditions are stated viz: "You also cannot claim if both of the following apply".

I read this as meaning that a two-director company, with both directors paid above the secondary (ie Employer's NI) threshold, would be eligible to claim EA.

Have I misinterpreted that HMRC guidance?

If not, and no ER NI is due for both directors then why wouldn't salaries above £12,570 continue to be the cheaper option (at least until you hit some other threshold - such as HRT, or profits below £50k )?

sparkler wrote:

Thanks again for all of the interesting, well thought out comments - I'm no longer going round in circles...

Mebbe, mebbe not.

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By sparkler
24th Jun 2023 08:59

I can't get the quotes to work properly, so apologies for replying to you without quotes...

1) Yes, I have used the correct amount of dividend tax in my calculations - 8.75% applied to post-tax profits

2) The small portion of salary between £9,100 (secondary threshold) and £12,570 (primary threshold) is subject to employer's NI but NOT employee's NI - the latter only kicks in at £12,570, the Primary Threshold. I'm sure I haven't made a mistake on this.

3) I agree with you that a two-director company, both being paid above the secondary threshold, would be able to claim the EA. HOWEVER in my client's case, the only reason for the second director (Director A) taking a salary above secondary threshold (£9,100) would be to trigger the claim for EA. It will cost 40% tax to do this (as he is already in the HR tax band), and the potential EA saving on Director B's salary isn't high enough to justify Director A taking this salary. So it's not that the company wouldn't be eligible for the EA if they wanted to be - it just isn't tax efficient for them to take a second salary in order to claim it.

Thanks (1)
By I'msorryIhaven'taclue
24th Jun 2023 09:19

sparkler wrote:

2) The small portion of salary between £9,100 (secondary threshold) and £12,570 (primary threshold) is subject to employer's NI but NOT employee's NI - the latter only kicks in at £12,570, the Primary Threshold. I'm sure I haven't made a mistake on this.

Thanks, Sparkler, you haven't made a mistake. I'd set my primary threshold @ £9,100 and secondary threshold at £12,570 in my (rudimentary stage) XL model. A**e backwards! Half-a-brainer!

Thanks for confirming re 2 director company and EA eligibility. At least something in my model is correct ;)

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By lionofludesch
24th Jun 2023 15:44

I&#039;msorryIhaven&#039;taclue wrote:
A**e backwards!

Surely that's what you're aiming for.

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By Beach Accountancy
26th Jun 2023 09:43

Back to that statistic of "90% of spreadsheets contain errors"...

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By petestar1969
26th Jun 2023 09:59

Pay it all as a dividend to Director B and have the other one waive theirs, maybe? There would need to be enough profit to pay the full dividend before the waiver.

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By youngloch
26th Jun 2023 18:38

Has anyone mentioned cashflow considerations? PAYE to be paid within a couple of weeks or CT and personal tax perhaps a year or more down the line?

In times of cashflow hardship, plus interest costs on late payment of tax, plus the ability to earn money on the cash whilst waiting (even pay the CT early to get 4%) then the opportunity cost has to be factored in when advising a client (in my opinion anyway!)

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By sparkler
01st Mar 2024 12:38

Apologies for replying to an old question, but the content is still completely relevant, and I keep coming back to one of the points I had originally considered, and struggling to reconcile my thinking!

I concluded above that it was most tax efficient for Director B to NOT take a salary simply in order to justify the Employment Allowance, as the 40% higher rate tax paid on the salary would be more than the eventual Employer NI saving.

However, I am wondering whether I should have considered the NET effect of the salary, i.e. 40% higher rate tax paid, less 26.5% marginal corporation tax saved.

In all other examples above, we have ignored the corporation tax saving when looking at the tax cost of salary, but I keep wondering whether I have drawn the correct conclusion here. There's still time to declare a £9,100 salary for Director B in 2023-24, and I don't want to make the same mistake again (if I have made a mistake!) in 2024-25.

I'd be very interested to hear anyone's thoughts, particularly those posters who responded to my original question. I have used the "tax cost of £100" model endlessly since last June - it is incredibly helpful!

Back to going round in circles again...

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By Gone Sailing
04th Mar 2024 10:44

I work on the basis that D1 is the principle earner, so D2 never gets a higher salary, but a higher dividend for D2 is ok.
I have them on A&B for dividend flexibility.
They both should take £12,570 salary, and claim EA.
At this point D1 is in HR but the co gets CT relief.
Now utilise D2's remaining BR as dividend. D2 now at HR point.
So both now on HR.
Dividends can be equal after this.

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By Charles B
22nd May 2024 21:41

Hi there, I am picking up this a bit late but see you have 'reopened' the discussion. I was thinking all the way through - net benefit of 40% IT less 26.5% CT which it seems you have now come to as well.

I am in a similar position to you but am going to slightly highjack your example for a more 'simple' and potentially more prevalent situation. I am working out the best overall position for my single Director Company who legitimately start to employ his wife for bookkeeping, invoicing and other administrative tasks.

The Director has no other income and previously taken £12,570 salary and £47,430 of dividends (he needs £60k to pay for living costs etc so it's a conscious move into Higher Rate). The 'take home' after dividend tax is ~£53.5k

His wife is already a HR tax payer (no shares in Company).

The Company makes profits chargeable to CT of £130k so is sat comfortably in the £50k-£250k marginal zone taxed at 26.5%. Assumption is that any additional salary paid will benefit from 26.5% tax relief.

By bringing his wife on board to help, he will open up the Employment allowance.

Proposed new pay (to achieve the same take home of £53.5k):

Director - £45,332 salary (no Employer NIC as covered by EA), £14,668 dividends. Total tax £12,846
Wife - £9,100 (£3,640 IT)

Take home pay = £52,614 (£69,100 - £16,486). More or less in line with previous take home pay under the 'traditional' salary/dividend structure.

However, due to the Company sitting in the marginal CT zone, the increased salary of £54,432 (£45,332 + £9,100) attracts CT relief at 26.5%.

So the way I see it, the couple are getting the same money out of the Company (~£53k) however the Company is saving CT of ~£11k ((£54,432-£12,570) @ 26.5%) which allows the Company's retained earnings to build up if future dividends are required.

As with all things like this, it seems too good to be true but I wonder if it is just a sweet spot of a) having Company profits well within the 26.5% bracket and b) 'activating' the EA through employing a spouse/partner c) treating the spouse/partner pay as part of the Company/family pot (obviously this wouldn't work if they kept the money for themselves as you would just be giving away £7.9k after factoring in CT relief on the £9.1k salary). If the spouse/partner was only a BR tax payer, the situation would be more efficient.

Is there anything obvious I am missing here? ALSO - let's play nicely and just assume the wife's role is legitimate and beyond HMRC challenge for the purpose of this example............don't derail the true point of the example.

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By Charles B
22nd May 2024 22:31

On second thoughts, an £11k benefit is too good to be true because I hadn't considered the retained earnings available at the end although I still think there is a £2k benefit. When you run a very simple draft set of accounts on it:

£130k - Taxable profit
£(12,570) - Salary
£(27.368) - CT
£90,062 - Profits available for distribution

£(47,430) - Dividends voted in year

£42,600 - Retained earnings

New/with EA:

£130k - Taxable profit
£(54,432) - Salary
£(16,725) - CT
£59,293 - Profits available for distribution

£(14,668) - Dividends voted in year

£44,625 - Retained earnings - £2k better off than traditional approach

Maybe its not worth the extra hassle for minimal gains although £1-£2k saving could help boost your fee by a margin.

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