Paying income tax on Salary and Dividends

[shard91]

Hello

I'm currently and employee of a company which pays me a PAYE salary and I also run an LTD company on the side.

For easy calculation let's assume my early earnings are £70K through my PAYE salary as an employee and a salary of £10K from my LTD company.

What is the most optimal way to pay my self from my LTD company? My understanding is that I will have to declare the £10K earnings from my LTD company which will increase my total earnings to £80K and will get taxed on this amount.

Please let me know if I'm missing something and if there's a better way

Thanks

[Chris88]

Hi Shard,

The most tax efficient thing you can do is to make a pension contribution through your limited company. This way the company gets full tax relief on the £10,000. You would be best talking to a financial adviser who can help you with this. I appreciate your circumstances might not suit this option.

You don't mention whether you have any other dividend income in the tax year. Provided you aren't already utilising your dividend allowance, you'll be best off paying a salary of £8,000 and a dividend of £2,000. The salary will result in tax of £3,200 but there will be no tax on the dividend. You'll also earn a qualifying year for State Pension.

If you are already utilising your dividend allowance, then taking the £10k salary is the best option.

[robbob]

My understanding is that I will have to declare the £10K earnings from my LTD company which will increase my total earnings to £80K and will get taxed on this amount.

Only if you draw funds into your pocket !! - even then your income wont quite be the same as company earnings due to corp tax paid.

Please let me know if I'm missing something and if there's a better way

You have the option of leaving funds within the company (on the basis you can pay less tax later - or at least have that option) or adding into your pension/sipp (presuming you don't breach any pension rules) - this would take the "higher rate" tax out of the equation for now.
In theory you could put 10k into pension and have no tax (whats not to like about that if you are closer to 50 than 30?) bill.
If you leave funds within company then the tax for now is just 19%

Other than that i would agree with summary of chris - one slight extra factor is that you wont be allowed salary and dividends totalling 10k as you have to factor in corp tax

So i would say most efficient level is likely to be
income 10,000
salary 7530 (reduces profit) - 40% paid as paye and 60% net salary paid - rti submisisons will needd to be made to hmrc
corp tax paid by business 19% = 470
dividends drawn £2000

Heres the maths (not the real one ) just some fancy numers in order of efficiency

dividend up to 2k - (presuming you are not in marginal band where tax could be due - 50-60k child b - over 100k pa) tax rate 0%
salary up to 8784 pa taxed at 40% paye - (note you have lower allowance first year to 5/4 if you started after 6/4)
dividend income above 2k taxed at overall margin rate of 45.3% - this factors in corp tax and dividend tax paid on income (19% corp tax on profit and 32.5% dividend tax on 81% extracted as dividend)
salary over 8784 - you are talking 50% plus as NI kicks in - worst option.

Hence the maths says take divis to 2k - then salary to 8784 (personal tax year used) then swap back to dividends

The maths (again not the real one speaking here) also says you want to become a tight wad and not draw the funds yourself - if you feel there is the option to halve the tax by extracting via other "later" route that avoids higher rate tax and you dont need funds particularly.

i am presuming bringing a partner into the business to work or as shareholder isnt an option?