Dividend NI

[skinner]

Am shareholder & director of small ltd co.
Now in 3rd year and started making profits so looking into paying smaller salary (£5035) and balance of income as dividend.

As far as I make out this saves all income tax, personal and company NI but dividend will be taxed at 19% at the end of the year.

My wife is concerned that dropping off the Inland Revenues radar like this will lead to investigation plus she is concerned that by not paying NI that I will not get a state pension and could be refused NHS treatment?

We are also concerned that we are missing something vital here as this seems to be quite a loophole. I dont want to get stung for a big tax/ NI bill down the line.

Can someone allay our concerns?

many thanks

Neil

[jpcentral]

Believe me - you don't drop off their radar. You will still have to submit a Self Assessment tax return every year.

So far as your pension/NHS entitlement is concerned, you will be earning above the Lower Earnings Limit (£84 per week). This is the threshold above which you are credited with a pension year. You wouldn't be refused NHS treatment in any case.

John Perry
Central Business Services
Loughborough
www.centralbusiness.co.uk

[frankevans]

your query is one many SME owners ask.many Accountants will advise clients to do this for what is in fact avery small saving overall when measured against the background of reduction in some state pension benefits(largely undervalued by people)and a reduction in the amount of pension planning you can do privately.
There could also be some unwelcome CGT consequences should you ever want your family to have some shares.
It is not possible to advise where to strike a balance on the small amoúnt of information given,
but beware of acting without advice, you could be losing a benefit worth up to £300,000 (depending upon age and salary) by using this route to save a few pounds now.
You will not be alone if you follow your own advice, but will I believe be poorer in the longer term.
We can help, and if you wish to contact us for an initial chat feel free.(01344 392830)
Frank Evans

[squowse]

It is worth paying yourself your personal allowance as salary as you will pay no tax or NI but maintain your basic state pension entitlement - something for nothing.

Although I don't have the figures to back it up - I would be extremely surprised if the 23.8% national insurance you will pay on profits drawn as salary would get you nearly as much state second pension pension as if you drew the money as a dividend and invested the money privately?

does anyone have the percentage for how much the government will put away for you? as their rebate for "contracting out" of the state second pension is 5.1%, i would imagine it to be similar...

[frankevans]

I am afraid that the previous contribution is something I totally disagree with, and demonstrates the misinformation prevalent about the subject.
On the contributers own admission he "does not have the figures" and misunderstands the way the pension is calculated and the amount of capital required to purchase the benefits privately.
Further, The effect of the relief for the company's NI contribution is ignored.
I said in my reply that it depends on age and profit what path to take, but the blase assumption that net income in a taxed environment will inevitably leave the enquirer better off is
to my mind a dangerous and naive response.
Proper advice and calculations from someone competent to quantify both sides of the equation is imperative.
Frank Evans

f.evans@iwm-pantheon

[CathyB]

Don't forget that if you earn at or above the LEL (£4,368) but below the earnings threshold (£12,500) the state second pension will be based on £12,500.