Dividend vs National ins Contributions

[darioariccio]

we are both director and looking to reduce our personal tax burden by paying ourselves the personal allowance limit ( i think aprox £4800 each) and then the £2000 at 10%. After that would it be possible to to pay the balance as dividends upto the 40% tax bracket? thus saving personally the Ni. I believe the company pays 19% + 10% (dividend release). Can you clear this up that A, this would be the best route and B the tax inplications. At the moment we pay ourseves a salary of 25k and then the rest as dividend some 6k.
Thank you
We are also putting into SIPPS Pensions next year, can you point us in the direction of good advice or would it be better to speak to a FA?

[Huw Williams]

Following the decision in the Arctic Systems case (Jones v Garrett), all advice in this area must carry a health warning. If what you are talking about could be construed as a way of transferring income from one person to another then the settlements legislation could apply to reverse the transfer.

Subject to that, the overall tax and NI cost is usually less when dividends are involved than when paying salaries.

As the main savings come from reducing NI contributions, I am not sure why you are considering paying more than the £4,895. The extra £2,000 creates a NI liability with (as I understand it) no corresponding NI benefit.

Small companies pay tax at rates up to 19%. If profits are below £50,000 (for a standalone company) the tax bill is lower than 19% and the rate depends on the actual profits. However the rate is increased back up to 19% to the extent that dividends are paid. If this sounds complicated, it is because it is!

In your circumstances, the level of dividends probably means you can forget any lower rates and expect to pay tax at 19% on the profits of the company.

What this means overall is that if you keep your pay below the tax and NI threshold and pay dividends within your basic rate bands, the only tax bill will be the 19% paid by the company.

What sort of advice are you looking for on SIPPS? If you want help with what to invest in within the SIPPS, you will need to talk to someone authorised to give that advice (such as an IFA). If you want advice on the tax implications, talk to a tax adviser...


Huw Williams
Nottingham

0115 914 6846

enquiries@huwwilliams.co.uk