"Optimum Salary £12,570 (above this use divs)"

Saving 0.2% minus the administration costs... Big Deal!

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Greetings, this fine September morn.

A two-director client company have presented me with an insistant though loosely drafted internet article imploring them to take £1,047.50 per month / £12,570 pa salaries, and anything over and above in dividends. Both directors are basic rate taxpayers.

I cannot get the numbers to make sense over such an exercise. Suppose we were to isolate a top-slice £10k salary payment / distribution and assume the £5k Employment Allowance excuses them from paying the first £5k of ER NI, then:

As a salary £10,000  - £2,000 income tax - £1,200 employee NI = £6,800 net pay in a director's pocket

As a dividend £10,000 - £2,345,68 CT @ 19% - £875 dividend tax = £6,779.32 net dividend in a director's pocket

A saving of just £20. Would someone please be kind enough to check my numbers above and/or tell me if I'm missing something.

Incidentally, whilst technically correct the article has been drafted in such a way as to imply far greater savings than 0.2%. Consequently, the clients are unhappy bunnies, even though we've already utilised their £1k div allowances elsewhere, their company bookkeeping is too loose to rely upon for distributable profits anyway, and I have a suspicion that taking the bulk of their distributions in divs might push company profits above £50k.

Replies (16)

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By williams lester accountants
01st Sep 2023 07:27

Why would they be paying employee NI on a salary of only £10k?

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Replying to williams lester accountants:
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By I'msorryIhaven'taclue
01st Sep 2023 07:31

It's a (hypothetical) top-slice £10k.

I'm fine with them earning £1,048 pm / £12,570 pa as a base salary. It's the dogmatic advice to take divs over and above that salary level that I'm struggling with - hence a top slice of £10k which, per my example, saves all of £20.

Am I missing something in my numbers?

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By Tax Dragon
01st Sep 2023 08:19

You're grossing up the CT rate for no reason I can think of.

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Replying to Tax Dragon:
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By I'msorryIhaven'taclue
01st Sep 2023 09:26

Hi TD,
Well I started with £12,345.68 pre-tax profits and then deducted 19% CT = £2,345.68 to arrive at £10k of profits distributable as divs. (To which I applied an 8.75% div tax for the top-slice for our basic-rate taxpaying protagonists.) An overall tax loss of £2,345,68 + £875.00 = £3,220.68 total tax cost.

However, I think you've highlighted the flaw in my numbers. My salary example based on £10k salary costs £3,200 in tax and NI (so £20 different to the div option) but then there's still £2,345.68 of taxable profits remaining in the company (if we're comparing like with like ie £12,345.68 of taxable profits in both cases) which is subject to CT @ 19% =£445.68

In my original post I'm comparing apples with pears; £12,345.68 of untaxed profits with £10,000.00

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Replying to I'msorryIhaven'taclue:
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By Tax Dragon
01st Sep 2023 09:37

You've deducted the CT from the £10,000. One of those is a net apple and one a gross pear, agreed. (A much simpler comparison is: company makes £10k extra profit. You take it all out (after CT). What's the net take? That's the computation rmillaree has kindly done for you.)

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By Tax Dragon
01st Sep 2023 08:26

(Also the way you had it it was a cost not a saving. Maybe you should give yourself a Friday off?)

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By I'msorryIhaven'taclue
01st Sep 2023 09:28

Ooops, yes the salary route was the (£20) cheaper route in my original numbers. Which would make even less sense.

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By Wanderer
01st Sep 2023 08:32

Haven't worked through your numbers however I recently looked at a scenario regarding very large marginal numbers and concluded that it had swung so remuneration resulted in a lower overall tax take than dividends.

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Replying to Wanderer:
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By Tax Dragon
01st Sep 2023 08:57

I can well believe that's true.

Does HMRC have any potential argument (assuming all else remains equal) if one year there's low salary plus divs, then next year high salary minimal divs? Or conversely any argument a couple of years later if maybe it swings the other way and there's once again low salary high divs?

I guess no more so than in any other year. Except perhaps over deductibility.

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By johnward
01st Sep 2023 08:36

The article probably relates to a single director as the only employee, which would then make sense to have director salary and then dividends above as can't claim ER Allowance

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By I'msorryIhaven'taclue
01st Sep 2023 09:05

Good point... although this particular article recommending a £12,570 salary alludes to both a single company director (who, for what it's worth, many blogs / accountants' back-pages recommend a £9,100 salary rather than £12,570 because of the effects of ER NI) and also alludes to a two director company, for which it offers the sage observation "A £5,000 Employment Allowance is available to Ltd companies with at least 2 directors (inc. husband & wife directors) earning above the NI Secondary Threshold, this offsets employers NI".

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By rmillaree
01st Sep 2023 08:55

"Would someone please be kind enough to check my numbers above and/or tell me if I'm missing something."
Unfotunately your calcs are gibberish

Ignoring the bonus divi taxed at 0%

for salary tax is 20% - ni 12% - total tax 32% as you say

however for dividends is 19% c tax first and 8.75% of 81% left = 7.09% divi tax total tax = 26.09%

saving of 5.91%

example of tax on divis

profit 10k
c tax 1900
8100 taken as dividends
708.75 divi tax
7391 left in pocket 591 more than taking as salary

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Replying to rmillaree:
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By I'msorryIhaven'taclue
01st Sep 2023 09:42

Thanks RM,
I'd reached the same conclusion in my 9.26 post... I was comparing £12,345.68 of profit div route with £10k of profit salary route. Doh!

You've compared two £10k profits; I went the other way when the penny dropped at at 9.26 by comparing two £12,345.68 profits. Needless to say, I like your £10k example better ;-)

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By ireallyshouldknowthisbut
01st Sep 2023 09:13

The saving is swapping the nil rate band of income tax from dividends to salary and depends on the tax rate of the company.

My conclusions earlier this years was the winners are companies in the 26.5% marginal tax band, with or without income.
For 19% CT rate companies, tax payers with no other income win as the dividend that would fall below the personal tax threshold becomes PAYE.

however those at 19% CT rate with other income would lose out by I think £37.

So it's an "it depends", especially if your are doing a rent arrangement for home office.

if you have Employers allowance then it works in all circumstances to take the salary upto when NI bites, ie for 2 director companies and with employees where the allowanced is not fully utilised.

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By johnthegood
01st Sep 2023 12:53

How about adding in some interest on a DLA, some rent for use of home and that extra bit of employment income or pension they forgot to tell you about - that would make it more interesting!

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By lam_ac
04th Sep 2023 10:04

To add a couple of variables (both NI related) to the considerations (which in my view means you need to be wary of a "rule of thumb" determination):

a) Salary already being received

The existing level of salary may be such that the comparison is between additional reward (dividend or salary) of which 2% Employees NI applies to the salary option - potentially swings in favour of salary.

b) Age

If the salary recipient is of a certain age no Employees NI at whatever level of payment (Above £9,100) This again may favour salary.

Also as a correspondent has remarked what is the marginal CT relief/cost of salary. Could save tax at, say 19%/26.5% or 25%

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