Upper or lower rate PAYE tax?

**Gonzo** · 16 March 2010, 23:36

First question is why do you think it would be a good idea to do this?

**Gonzo** · 16 March 2010, 23:50

I promised to stop posting in Accounting / Legal because my UK knowledge is getting out of date since I don't pay UK taxes any more.

Are you perhaps thinking that the increases to the small companies tax rate would make you better off paying income tax at 20% than corporation tax at 21%, 22%, 23% or whatever it is going up to?

Don't forget that any PAYE you pay yourself will also attract Employers NI and Employees NI so you will still be better off paying yourself in dividends rather than PAYE (above the zero tax threshold).

**Sockpuppet** · 16 March 2010, 23:53

Originally posted by mobwell View Post

OK, I know, ask my accountant, but it's nigh on impossible to get past his secretary so I thought I'd do a bit of research first.

So, I've been contracting for my limited company paying myself about £70K per year as £10K PAYE and £60K dividends. My question is this. If I change this balance to say £25K PAYE and £45K dividends, will the extra £15K paid as PAYE attract income tax at the lower rate of 20% (as my PAYE is below the higher rate tax band) or 40% as my total of PAYE + dividends is above the higher rate tax threshold? The same question applies to the NI contributions on this PAYE. Will I need to pay 11% or 1%?

Simple answer. Pay yourself as little as possible PAYE over the tax free threashold £6,470 for next year.

The rest as dividends. Sorted.

This is the most tax efficient way.

**mobwell** · 17 March 2010, 00:40

I totally agree. Normally small PAYE, big dividends is the way to go for tax efficiency, but this question relates to maternity pay. If the average PAYE salary increases so does the statutory maternity pay, particularly for the first 6 weeks. I wanted to better understand the tax implications of paying a higher salary for a couple of months to get the average up. Obviously paying this way rather than via dividends attracts NI both for the company and the employee as do the maternity payments received later. I just don't know if these would attract 20% or 40% tax and 11% or 1% employee NI as mentioned in my first post.

**escapeUK** · 17 March 2010, 07:04

Maternity pay???????? You madam are a disguised employee!

**Sockpuppet** · 17 March 2010, 08:08

Upto £844 a week PAYE is 11%. Dividends don't attact NI. So that's £2200 before you even start in extra tax.

Then there is employer NI tax.

To be honest if your going pay yourself 70k it might be worth paying it as all PAYE as I think the low paye high divs only works upto the upper threashold for 40% tax.

After that your paying 22% corp tax + 20% higher rate paye tax which is less than the 40% paye you'd pay.

I'd ask your accountant for an illustration.

**NotAllThere** · 17 March 2010, 08:53

Originally posted by mobwell View Post

OK, I know, ask my accountant, but it's nigh on impossible to get past his secretary...

Perhaps a new accountant is in order.

**VectraMan** · 17 March 2010, 10:25

Originally posted by mobwell View Post

I just don't know if these would attract 20% or 40% tax and 11% or 1% employee NI as mentioned in my first post.

You seems to be under the impression that once you pass the 40% threshold, all your income is taxed at 40%. It isn't. The first 5K ish is income tax free, the next 33K ish is at 20%, and the rest at 40%.

If it was just income tax what you're doing wouldn't make that much difference, but you're voluntarily paying a lot more NI this way.

And get an accountant that you can contact.

**blacjac** · 17 March 2010, 10:37

Originally posted by escapeUK View Post

Maternity pay???????? You madam are a disguised employee!

What's wrong with taking maternaty pay from your own Ltd?

And as far as being a disguised employee that's bollocks, there is no disguise at all, I am and employee of my Ltd Company, but not of my Ltd Companies clients.

Upper or lower rate PAYE tax?