Hi all,
Can someone help me to understand this:
In the case of some individual contractors, I understand it is more tax efficient to set up as a Ltd Company and pay themselves up to the tax free allowance of £8105 (for 2012-13) via PAYE and the rest as dividends, instead of paying 100% PAYE or in fact being self-employed (whereby their taxable income is subject to the relevent income tax rate).
If I'm correct, at the basic rate tax limit, dividends do attract income tax of 10%, but for most shareholders this is normally offset by a tax credit of 10%. So the individual in effect doesn't pay income tax.
However in the case of consultant working under their own Ltd company, they (as the company) pays the tax credit and so still reduces their available remuneration by 10%). Higher earners attract a higher rate of income tax (32.5%) less 10% tax credit.
Dividends do not attract National Insurance (although you can make manual payments to HMRC) and therefore overall the contractor appears to save on tax.
But dividends do attract Corporation tax along with the rest of the company 'earnings' (profit), which in most cases is 20%.
As a contractor earning over the threshold, they would also have to register for VAT - I assume in this case, they charge VAT to their employer to offset any VAT they pay to HMRC.
Assuming the above is correct (please tell me if not), could someone give me some examples (using figures) to illustrate how paying yourself this way is more tax efficient than via PAYE and where people can feasibly fall foul of HMRC.
This is baffling me, so would appreciate any advice.
Many thanks
Adam
Can someone help me to understand this:
In the case of some individual contractors, I understand it is more tax efficient to set up as a Ltd Company and pay themselves up to the tax free allowance of £8105 (for 2012-13) via PAYE and the rest as dividends, instead of paying 100% PAYE or in fact being self-employed (whereby their taxable income is subject to the relevent income tax rate).
If I'm correct, at the basic rate tax limit, dividends do attract income tax of 10%, but for most shareholders this is normally offset by a tax credit of 10%. So the individual in effect doesn't pay income tax.
However in the case of consultant working under their own Ltd company, they (as the company) pays the tax credit and so still reduces their available remuneration by 10%). Higher earners attract a higher rate of income tax (32.5%) less 10% tax credit.
Dividends do not attract National Insurance (although you can make manual payments to HMRC) and therefore overall the contractor appears to save on tax.
But dividends do attract Corporation tax along with the rest of the company 'earnings' (profit), which in most cases is 20%.
As a contractor earning over the threshold, they would also have to register for VAT - I assume in this case, they charge VAT to their employer to offset any VAT they pay to HMRC.
Assuming the above is correct (please tell me if not), could someone give me some examples (using figures) to illustrate how paying yourself this way is more tax efficient than via PAYE and where people can feasibly fall foul of HMRC.
This is baffling me, so would appreciate any advice.
Many thanks
Adam