Minimum Tax rates....

[denver2k]

Hi,

Iv setup a limited company. And, I am just wondering what is the annual salary amount on which minimum tax applies.

Thanks.

[expat]

Hi,

Iv setup a limited company. And, I am just wondering what is the annual salary amount on which minimum tax applies.

Thanks.

If you mean how much salary can be paid before Income Tax is due, Hector is your friend.

The PAYE thresholds (the level of earnings at which tax becomes payable) are:

• £116.00 weekly
• £503.00 monthly

If you don't know what you are doing, you almost certainly need an accountant, at least at first.

[Hex]

Also - from the same link above - 20% tax is paid on the first £34,800. Add this to your personal allowance of £6,035 and you can earn £40,835 before you pay higher rate (40%) tax.

[denver2k]

Thanks for your replies guys....

Expat !!

Yes i had a discussion with accountant a while ago. He said we'll setup your salary £10K / annum and rest for dividend.

My only concern is that i'd like to pay minimum possible tax in salary.

You said PAYE thresholds is £503.00 monthly (i.e 6036 annum), in which case i should have salary of £6035/annum (to pay no tax on salary).

And what about taxes on dividends, is it with the same rate (i.e. 20 per cent up to £34,800 e.t.c)? And corporation tax applies on profit or total revenue ?

My understanding about Ltd company's taxes and profits is:

Total Revenue - Expenses - Salary (Tax , NI)= Profit
Profit - Corporation Tax = Dividend (some tax on that as well).

Please do correct me if im wrong.

Thanks

[expat]

Thanks for your replies guys....

Expat !!

Yes i had a discussion with accountant a while ago. He said we'll setup your salary £10K / annum and rest for dividend.

My only concern is that i'd like to pay minimum possible tax in salary.

You said PAYE thresholds is £503.00 monthly (i.e 6036 annum), in which case i should have salary of £6035/annum (to pay no tax on salary).

And what about taxes on dividends, is it with the same rate (i.e. 20 per cent up to £34,800 e.t.c)? And corporation tax applies on profit or total revenue ?

My understanding about Ltd company's taxes and profits is:

Total Revenue - Expenses - Salary (Tax , NI)= Profit
Profit - Corporation Tax = Dividend (some tax on that as well).

Please do correct me if im wrong.

Thanks

IANAA (I Am Not An Accountant) but your understanding looks ok to me.

You should get your accountant to explain to you what he is doing. ISTM that he is not actually trying to reduce your tax to zero, just to a very small amount.

I believe that some people think that paying exactly what qualifies for 0 tax will invite unwelcome attention from HMRC, or that paying less than National Minimum Wage will likewise attract unwelcome attention. But I couldn't really tell you about this, since I just earn my money and pay my tax.

[denver2k]

Yeah sounds like that's the plan of my accountant....

Dont get unwanted attention by paying No Tax.....

Anyways, Thanks a lot....

[Nick44]

dont fall into the minimum wage trap by looking too hard at the tax paid

minimum wage is £5.73/hr
working week is... hmm whatever u think, but i'd go for 35-40 hours
month is approx 4.3 * weekly

thats how i'd look for a rough starting point

paying urself 6k/yr would mean u could work approx 20 hours a week

dont confuse tax law and employment law or u will have problems

[XLMonkey]

most accountants advise that you should pay yourself the national minimum wage, based on a 40 hr week and monthly salary. I forget the exact calculation, but it adds up to about 10.5k pa.

Why do they advise this?

1. Habit - its a long-standing convention for small business owners (regardless of whether they are contractors - people running corner shops and other small businesses do exactly the same thing)
2. They think that, if HMRC investigate your affairs, then the fact that you are paying yourself the minimum wage means that you are complying with all relevant tax and employment laws (and hence in the clear).
3. The law itself, whilst a little ambiguous in the case of directors, does imply that for a full-time employee, the minimum wage is c. 10.5k pa.

Does it reduce the probability of being investigated by HMRC?

- Despite lots of folklore, I've not seen any evidence that it reduces the probability of being investigated. HMRC use a whole lot of ways of picking who to investigate (ranging from complex algorithms, to random number generation); but looking for people with a salary of less than 10k isn't one of them.

If you get investigated, does it help you avoid being assessed for extra tax?

- again, despite lots of folklore, I've not seen any evidence that it makes a blind bit of difference. Most cases that go to court are based on IR35 compliance, and your IR35 status has nothing to do with whether you pay yourself 5k or 10k.

So.... what you're left with is just "one of those things accountants do"

(by the way, I do pay myself the minimum wage, but this is because its the minimum allowable under employment law, not because I think it would help me in the event of a tax investigation).

[Archangel]

If you get investigated, does it help you avoid being assessed for extra tax?

When I was investigated for IR35 (I passed) the fact that my company was paying me £6000 a year was not mentioned. (nor the fact that I was paid a monthly dividend).

YMMV

[blacjac]

It is my understanding that you only have to pay yourself the minimum wage if there is a contract of employment in place between you and your company....

IANAL