UK Saving money?

[Leitmotif]

Hi all,

I'm a UK resident and not an accountant. I was self-employed until the middle of this tax year, paying 20% income tax on the profit from self-employment and 8% National Insurance. My accountant advised that I could save money by registering the company as a Ltd. and paying myself a wage low enough to avoid income tax and NI but high enought to qualify for state pension, etc. Basic stuff. The idea being to pay 20% corporation tax, thereby saving me 8%. In theory. However, I've just found out you pay income tax on dividends, with the lowest rate for this being 10%. So doesn't this mean I'll actually end up paying more?

I know this is probably a naïve question, but I'm good at what I do and I pay accountants and IT specialists to be good at what they do, so there's a good deal of trust here.

 

[Becky]

If your total income falls within the basic rate band then you shouldn't end up paying income tax on your dividends. When you receive dividends from UK companies they are deemed to be received net of a 10% tax credit, and this credit can then be taken off your eventual tax bill. An example helps here I think:

Let's ignore the personal allowance and other income for now and assume the dividends all fall within the basic rate band. If you received £9,000 in dividends it would be deemed to be a net figure, therefore it will be grossed up by 100/90 and a figure of £10,000 would be recorded on your tax return. This would be subjected to income tax at 10% being £1,000. A notional credit for the gross up is then taken off this figure. The notional credit is £10k less £9k, being £1,000. Therefore the tax less the credit is nil.

Hope this helps!

 

[Cheaper Accountant]

The above post is correct. You will not pay tax on dividends as long as you are a basic rate tax payer (20% income tax). The advice you received from your accountant is sound advice and will save you tax.