Potentially a stupid question (?) but I have recently taken over a new client and the previous accountant had processed extraction of profits (circa £30k per annum) from company to director as £15k salary, £15 dividend.
I have done some calcs and this seems to be more tax efficient (to give director same amount in hand) that the usually quoted £6k(ish) salary and £15k dividend - am I missing something?
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Divi salary
Well I think you are missing about £9K from the divi.
Assuming that reserves are large enough to support an increased divi the the split of £6K salary and £24K divi would tend to give the best tax result, but there maybe another reason that profits have been extracted £15K and £15K.
Sorry......
I may be being stupid, but my calcs show that the Corporation Tax saving by paying a salary of £15k (CT saving on Salary + Emper's NI) when combined with the CT payable re the £15k dividend is still greater than the CT saving/Ct due on dividend in the £6k salary/£24k dividend option - is this not the case?
I make it....
£1120 better off using £6k salary and balance as divi (using 2010/11 rates)
Not sure how £15k salary (actually £13,947+£1053 ers NIC) /£15k div is better
Have you overlooked
... the employee's NI contribution?
Or do you not consider NI a tax when talking about tax-efficient and tax savings?
Re pension
If contributions to the director's pension were desired, it would usually be most tax efficient for the company to make them.
Wrong
You are definately missing something in your calculations.
I carry about various tables to quickly refer to at new clients meetings (comes in handy when their current advisor has advised a salary of above the NI Limit for no apparent reason - of course there can be valid reasons - but the typical reason I find is the current advisor thinks that is "safer"). My chart says that you are paying £1,715.40 more tax overall [(Ee's Ni + Er's Ni + Income Tax) less corp tax relief] by paying a salary of £15k compared to £5715.
Pretty please?
Thank you! I don't suppose you would be prepared to email your very very useful chart? Pretty please?
Thanks
Still not there :(
Hi, again excuse my dumbness but I still only get it to be a difference of around £400:
Salary (inc Emper's NI) = £15,000
results in PAYE: £1494, E'ee NI £905, E'er NI £1053
less CT saving of £3150
Dividend payment of £15k will result in CT of £3150
Total 'tax etc' = £3452
By paying salary of £6k and balance (to ensure director receives same amount in hand as above) of £20548 as dividend
results in PAYE: nil, E'ee NI £30, E'er NI £35
less CT saving on salary of £1267
Dividend payment of £20548 will result in CT of £4296
So all in all,
Option 1 (Taxes less CT saving) = £1494+£905+£1053+£3150-£3150=£3452
Option 2 (Taxes less CT saving) = £65+£4296-£1267=£3064
Option 2 saves £388 - please tell me if I am wrong?
£1,715.40
thacca has calculated the £1,715.40 as follows: -
The NI on a salary of £15,000 would be employees £1,021.35 and employers £1,188.48. The tax on the salary would be £1,705.00. The company would receive additional tax relief at 21% on the employers NI of £249.58. The total cost is, therefore, £3,665.25 (1,021.35+1,188.48+1,705.00-249.58).
The corporation tax liability on a profit of £9,285 (15,000 less a salary of 5,715) at 21% would be £1,949.85.
The saving is £3,665.25 less £1,949.85 = £1,715.40.
But why.....
Why is the corporation tax saved by paying the salary in the first place not included in the comparison?
(Thank you for the clearly laid out calculations!)
Full comps with 2011/12 figures
Proft £30,000, Salary £15,000
Employer NIC = £1,094. Taxable profit £13,906, CT £2,781. Divi (net profit) £11,125
PAYE on salary £1,505, Eees NIC £933. TOTAL TAX & NIC £6,313
OR : Profit £30,000, Salary £7,072 (£136 x 52)
NIC nil for all. PAYE NIL. Taxable profits £22,928, CT (only liability) £4,586
Difference £1,727
I guess you might have worked out why you were wrong ...
but just in case ... the logic error in your assumptions is that you pay a different amount of CT depending on the dividend level. Of course you pay tax on profits regardless of whether they are distributed or not. In your scenario the only important thing to consider is how much CT do you lose by dropping the salary & NIC compared with how much additional PAYE will it cost your client.
Personal service company?
Some accountants are advocating the payment of a salary of £15,000 from personal service companies to negate the IR35 issues.
I am aware this figure changes from accountant to accountant.
You should check whether this would apply in this instance and if appropriate take advice from your PI provider.