You're right - but it depends how and when you pay yourself... a balance of salary and dividends, where dividends are not deductible. For me I may have a good year followed by a weak year, so I use last year's profit to keep me going!
> If you're in the UK and still using dividends as a significant method to self-compensate, you may benefit from speaking to a (better) accountant.
I'm curious what you're eluding to here? Using dividends as a significant method to self-compensate (for single-person companies) seems to be a pretty common practice recommended by every UK accountant I've spoken to / used.
There's roughly £12,000 tax free allowance on salaries and only £2500 on dividends. The common recommendation is to maximize your tax free allowance (pay yourself 12k PAYE) and then pay out anything else as dividends (though dividends legally require you operate at a profit).
That's the standard common advice that I'm referring to and that the post I replied to seemed to suggest is not what a (better) accountant would recommend.
It's the advice I've received too, but I'm also new to most of it. One downside (I think) is that I can't take advantage of the R&D tax credits with this approach!
It mostly depends if you intend to make significant pension contributions.
Let's say your company has £100K to play with and you want it all.
- You can pay yourself a £100K salary, of which take home pay will be about ~£67K
- You can pay yourself a £8,840 salary tax free in order to qualify for the state pension but minimize national insurance, and pay 19% corporation tax on the remaining £91,160, which leaves £73,839 to pay in dividends. Take home pay will be ~£69K. A win.
- Roughly (as this is more complicated). You can pay yourself a £48,840 salary, sacrificing £40K in to your pension completely tax free, pay corporation tax on the remaining ~£51K, and then pay it out as dividends. Take home will be about ~£47K with another £40K in your pension!
- More elaborate schemes are possible, where you use your personal pension to invest in commercial property which you then lease back to your company as a tax deductible expense.
I am surprised such loopholes still exist in UK. In Australia if you setup a company and 80% of the company's income is only from your own personal services from a single client then your company has to pay tax on personal income tax rates. These sort of loopholes were closed many moons back.
I don't think that's really such a huge loophole. Pension aside, it's a 2% difference in total tax burden that's probably going to be swallowed up by other company related admin expenses anyway.
I'm self employed and get the bulk of my income through dividends. As with the example above, I often end up paying roughly the same amount of tax as someone with the equivalent salary would.
The big advantage for me is that I can have a very good year and a very bad year and pay an appropriate (smoothed out) level of income tax across both - which seems fair to me.
Not only that but you get significant tax relief on your £40k pension contributions (about £8k I think) so takehome plus pension is about £95k from the £100k initially.
Sure, so Microsoft still (not so) indirectly contributes to the tax coffers. But it's still pretty bad that the rich MS shareholders can benefit from schemes like these, while employees can't.
