Rate rise but still take home same amount

[heyya99]

I got a £65 rate rise with my contract extension - but am still paying myself the same income as I was before the rise. To make my business tax efficient, I take a minimal salary and a tax-free dividend. My accountant tells me that if I take a larger dividend, I will be paying 25% tax on it.

To be tax efficient, am I correct in saying a contractor on a day rate of 400 will be taking home the same as a contractor on 1000?

[kal]

I got a £65 rate rise with my contract extension - but am still paying myself the same income as I was before the rise. To make my business tax efficient, I take a minimal salary and a tax-free dividend. My accountant tells me that if I take a larger dividend, I will be paying 25% tax on it.

To be tax efficient, am I correct in saying a contractor on a day rate of 400 will be taking home the same as a contractor on 1000?

Where does one begin...

[tractor]

Where does one begin...

[eek]

+1 as you have an accountant ask them to explain it to you.

[kaiser78]

I got a £65 rate rise with my contract extension - but am still paying myself the same income as I was before the rise. To make my business tax efficient, I take a minimal salary and a tax-free dividend. My accountant tells me that if I take a larger dividend, I will be paying 25% tax on it.

To be tax efficient, am I correct in saying a contractor on a day rate of 400 will be taking home the same as a contractor on 1000?

Okay, so I will try to help with this one.

Potentially yes to what you say, what you draw from your ltd company could be the same regardless if on 400 or 1000, if you want to maximise your tax free allowances. You could take more to exceed the tax thresholds, but would then incur additional tax on dividends etc. This though would depend on how much funds you would have available to take out, bearing in mind this needs to be after provision for annual corporation tax is made.

[TheCyclingProgrammer]

Yes, of you don't want to be a higher rate tax payer. There are other things you could do to extract money from your company depending on your circumstances; you may be in a position to divert some income to a spouse or civil partner or pay money into a pension. You should seek professional advice on what strategies are available to you. This is what your accountant is there for.

Regardless, the contractor on the higher rate is still going to be much better off in the long term...higher retained profit in the company means a bigger warchest if you can't find work, the option to take out an extra big dividend if you need the money (and are happy to pay the extra tax) and a larger reserve of cash that you could potentially end up only paying 10% CGT on if and when you decide to shut the business down. You've got to think of the bigger picture.

[heyya99]

This though would depend on how much funds you would have available to take out

Thanks for being civil.

What do you mean by the above part?

[heyya99]

Yes, of you don't want to be a higher rate tax payer. There are other things you could do to extract money from your company depending on your circumstances; you may be in a position to divert some income to a spouse or civil partner or pay money into a pension. You should seek professional advice on what strategies are available to you. This is what your accountant is there for.

Regardless, the contractor on the higher rate is still going to be much better off in the long term...higher retained profit in the company means a bigger warchest if you can't find work, the option to take out an extra big dividend if you need the money (and are happy to pay the extra tax) and a larger reserve of cash that you could potentially end up only paying 10% CGT on if and when you decide to shut the business down. You've got to think of the bigger picture.

Sounds like you are agreeing with me on the fact that, being tax efficient, a 400 pd contractor takes home the same as a 1000 pd one. I'm fully aware that the business benefits long term. I was enquiring about the benefit to the employee. I don't get the condescending responses from other posters since my question was valid and accurate.

[kaiser78]

Thanks for being civil.

What do you mean by the above part?

You can only make withdrawals on funds that are available once you have provisioned for tax payments in that financial year, ie with what funds are available once tax deductions would have been made.

This is where your accountant can help you navigate you through and/or maybe the helpful accounting professionals that post on here can also explain better than I can.

[kaiser78]

Yes, of you don't want to be a higher rate tax payer. There are other things you could do to extract money from your company depending on your circumstances; you may be in a position to divert some income to a spouse or civil partner or pay money into a pension. You should seek professional advice on what strategies are available to you. This is what your accountant is there for.

++1 this is a key part to running a ltd company to maximum efficiency.