LTD company - 1 Director - 1 salary

[mike]

If you were the sole director of LTD company employing "0" persons, and your
company turned over £250k a year, £180k profit.

What exactly is the best method of paying yourself the highest salary
possible with the least tax possible?

One professional suggested to me that the best thing to do is to pay myself
a salary of £400 a month, and then takes dividends of £30k per year. Would
you agree with this?

 

[Barney]

If you were the sole director of LTD company employing "0" persons, and your
company turned over £250k a year, £180k profit.

What exactly is the best method of paying yourself the highest salary
possible with the least tax possible?

One professional suggested to me that the best thing to do is to pay myself
a salary of £400 a month, and then takes dividends of £30k per year. Would
you agree with this?

If I was turning over 180 from 250 profit, I would be less of a miser and
employ an accountant, actually.

 

[mike]

If I was turning over 180 from 250 profit, I would be less of a miser and
employ an accountant, actually.

who said I hadn't? ..... I don't think it's wrong to have more than 1
opinion.

 

[Ronald Raygun]

If you were the sole director of LTD company employing "0" persons, and
your company turned over £250k a year, £180k profit.

What exactly is the best method of paying yourself the highest salary
possible with the least tax possible?

There is none. If you pay yourself any salary at all, then you
aren't employing "0" persons.

One professional suggested to me that the best thing to do is to pay
myself a salary of £400 a month, and then takes dividends of £30k per
year. Would you agree with this?

What would you be doing with the other £145k a year?

 

[mike]

mike wrote:

What would you be doing with the other £145k a year?

well, it would be taxed @ 32% right?

 

[Edward Cowling]

who said I hadn't? ..... I don't think it's wrong to have more than 1
opinion.

And don't forget to ask all your mates down the pub

Seriously, I've known more tension and trouble caused
between directors and their accountants by misinformed
opinions than anything else. We don't know the full context
of the advice, your business history, how closely the revenue
will be looking at you, etc, etc, etc.

You pay the guy, so listen to him !

 

[John-Smith]

If you were the sole director of LTD company employing "0" persons, and your
company turned over £250k a year, £180k profit.

What exactly is the best method of paying yourself the highest salary
possible with the least tax possible?

One professional suggested to me that the best thing to do is to pay myself
a salary of £400 a month, and then takes dividends of £30k per year. Would
you agree with this?

absolutely correct

 

[John-Smith]

well, it would be taxed @ 32% right?

You do need to have this bit explained. When you draw a dividend it is
assumed that you have already paid some income tax (basically because
of the corporation tax treatment). YOU then have to pay a further 25%.
So if you draw a divi of 100k, put 25k of that aside for income tax.

 

[Ronald Raygun]

well, it would be taxed @ 32% right?

At 39.25% actually (first 19% CT, and the remaining 81% are then
taxed at 25% (because the 81% are grossed-up to 90% which are then
taxed at 32.5% of which 10% is deemed pre-paid, so only 22.5%
of 90% remain payable which is 25% of 81%)). So at the end of the
day you're left with 75% of 81% which is 60.75%.

But 60.75% of £145k is still better than 100% of nothing.
So what *would* you be doing with the £117,450 left after
paying the Corporation Tax on £145k? OK, you might use it to
"help grow the business", but surely in the end the point of
doing that is to reap more rewards. A side effect of that is
that loads more tax would be paid in years to come.

Don't be such a philanthropist, take the money now!

Seriously, the question is what you are trying to optimise.
Are you trying to minimise your tax bill, or maximise your
net income? They are not the same, because in one case the
money stays in the company, so you need to assess the value
of that.

 

[SArma]

http://transfermoney.20m.com

 

[Tim]

absolutely correct

Even if the £250Kpa turnover/£180Kpa profit were highly likely to be
sustainable into the future? In that case, why not pay out the rest of the
profit each year as well??

Of course, if the idea is to stop trading within a few years & then just sit
back and take the £35K-odd each year until the money runs dry, then the
£400pm salary/£30Kpa divi may be the answer ...

 

[John-Smith]

Even if the £250Kpa turnover/£180Kpa profit were highly likely to be
sustainable into the future? In that case, why not pay out the rest of the
profit each year as well??

Of course, if the idea is to stop trading within a few years & then just sit
back and take the £35K-odd each year until the money runs dry, then the
£400pm salary/£30Kpa divi may be the answer ...

There is something in the latest legislation which might affect one's
ability to retain profits and draw them out in future years as
dividends. I don't understand it; I know from my accountant that it
doesn't apply to my situation so I haven't dug deep into it. But it's
worth looking at.

In the past you could have retained profits indefinitely without
penalty, and drawn them out gradually while avoiding 40% tax.

 

[Tim]

In the past you could have retained profits indefinitely without
penalty, and drawn them out gradually while avoiding 40% tax.

Exactly. But my point was that you can be (fairly) sure that you won't be
around *forever*. If the company constantly produces a profit in excess of
around £35-40Kpa, then you'd simply be storing up the retained profits for
someone else to spend after you die.

Why not, therefore, distribute some (/all?) of the profits in excess of
£35-40Kpa, and enjoy them yourself - while you are still alive??

 

[John-Smith]

Exactly. But my point was that you can be (fairly) sure that you won't be
around *forever*. If the company constantly produces a profit in excess of
around £35-40Kpa, then you'd simply be storing up the retained profits for
someone else to spend after you die.

Why not, therefore, distribute some (/all?) of the profits in excess of
£35-40Kpa, and enjoy them yourself - while you are still alive??

I agree with all of the above. That's what I do

Reasons for retaining profits might be

- cash for future capital investment

- temporarily minimising your income (e.g. for child maintenance
assessment purposes, or some similar reason like an expected court
case with an income-related fine, or planning to leave the UK)

- keep income in a lower tax bracket

Also, let's say you plan to marry (strange thing for me to suggest
given previous comments ). A few years down the road, your wife will
in effect acquire a 1/2 stake in all your assets including the
business, so, in for a penny in for a pound, you may as well give her
shares in the business (or transfer some of yours to her, it is free
of CGT but you pay 0.5% stamp duty IIRC) and then she can draw out a
load of dividends as well, making full use of her basic rate tax
bands. But then you might have an even messier divorce because she can
easily destroy your livelihood if she wants to. Especially as her
basic rate bands are unused, i.e. she isn't working, i.e. she almost
certainly married you for financial support. Oh well... forget that
one

 

[Peter Saxton]

There is something in the latest legislation which might affect one's
ability to retain profits and draw them out in future years as
dividends. I don't understand it; I know from my accountant that it
doesn't apply to my situation so I haven't dug deep into it. But it's
worth looking at.

Sorry, I don't know what would stop you doing that.

In the past you could have retained profits indefinitely without
penalty, and drawn them out gradually while avoiding 40% tax.

Like the present and future?

 

[Peter Saxton]

Exactly. But my point was that you can be (fairly) sure that you won't be
around *forever*. If the company constantly produces a profit in excess of
around £35-40Kpa, then you'd simply be storing up the retained profits for
someone else to spend after you die.

Why not, therefore, distribute some (/all?) of the profits in excess of
£35-40Kpa, and enjoy them yourself - while you are still alive??

I don't think you need to look until death. I'd hope there would be
plenty of time to take advantage of a tax saving or wealth creation
strategy before death come.

 

[Martin]

Also, let's say you plan to marry (strange thing for me to suggest
given previous comments ). A few years down the road, your wife will
in effect acquire a 1/2 stake in all your assets including the
business, so, in for a penny in for a pound, you may as well give her
shares in the business (or transfer some of yours to her, it is free
of CGT but you pay 0.5% stamp duty IIRC)

I don't think so - gift between spouses

 

[John-Smith]

Sorry, I don't know what would stop you doing that.

I read it but no longer have the URL. It is on the Revenue website. It
concerns taxation of retained profits.

 

[Martin]

I read it but no longer have the URL. It is on the Revenue website. It
concerns taxation of retained profits.

Retained profits drawn by non-corp as dividend in later year are subject to
NCDT - so if underlying CT rate in year of withdrawal is less than 19%,
they'll be subject to further tax, regardless of the fact that the profits
from which they derive may previously have been taxed at 19% or more.

 

[John-Smith]

Retained profits drawn by non-corp as dividend in later year are subject to
NCDT - so if underlying CT rate in year of withdrawal is less than 19%,
they'll be subject to further tax, regardless of the fact that the profits
from which they derive may previously have been taxed at 19% or more.

It is here where I saw it originally