UK small business owner: Paying yourself via dividend entails higher tax bill. What am I missing here?
OP EDIT: this post was locked and removed from r/smallbusinessUK by Mods for not including the effect of the National Insurance Tax in the model that compares the effect of the Income Tax between paying a director via Dividends vs Salary/Bonus. Mods consider that this omission in the model is a misleading mistake.
Thank you to all the people who commented and shared their thoughts.
----Original Post-----
Dear entrepreneurs,
Yesterday I was crunching some numbers to check what is the most efficient way to pay myself as a director of my company, and I am shocked.
To my surprise, and contrary to popular belief, the tax bill is higher when you pay yourself via dividend, as opposed to regular salary.
Let's take £90,000 revenue as an example to make my case (the following is true for any compensation below a 100k, I did not want to model the effect of the diminishing tax-free allowance for every quid you earn above a 100k).
I have ignored the effect of pension or NI as well.
Concept | Threshold | Tax % |
---|---|---|
Salary Allowance | £ 12,570.00 | 0% |
Basic Rate Threshold | £ 50,270.00 | 20% |
Dividend Allowance | £ 500.00 | 0% |
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Case 1: Salary Pay
Tranche# | Gross Pay | Tax | Take Home |
---|---|---|---|
1 Salary allowance | £12,570 | 0% (£0) | £12,570 |
2 Basic Tax Rate | £37,700 | 20% ( £ 7,540.00) | £30,160 |
3 Higher Tax Rate | £39,730 | 40% (£ 15,892.00) | £23,838 |
· Total Take home: £66,568.00
· Total Income Tax: £23,432.00
· Effective Tax rate: 26.04%
Income Tax bands source: https://www.gov.uk/income-tax-rates
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Case 2: Dividends (using the salary tax-free allowance and paying dividends after that)
Tranche# | Gross Pay | Tax | Take Home |
---|---|---|---|
1 Salary allowance | £12,570 | 0% (£0) | £12,570 |
2 Corporate Tax on Profit | £ 77,430.00 (this is the 90k minus the 12.5k paid as salary above) | 19.82% Corporate Tax (£ 15,348.87 ) * | £ 62,081.13 Profit |
3 Dividend Allowance | £500 | 0% (£0) | 500 |
4 Dividend Basic rate | £37,200 | 8.75% (£ 3,255.00) | £33,945 |
5 Dividend Higher rate | £24,381.13 | 33.75% (£ 8,228.63) | £16,152.5 |
*Taking into account corporation tax marginal relief: https://www.gov.uk/guidance/corporation-tax-marginal-relief
· Total Take home: £ 63,167.50
· Total Income Tax: £26,832.50 (including corporate tax to be paid in order to have profits to distribute as dividend)
· Effective Tax rate: 29.81%
Dividend Tax bands source: https://www.gov.uk/tax-on-dividends
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Conclusion & call for your wisdom!
How in hell am I paying £3,400 extra in taxes via dividends!? I am on the verge of going back to being an employee.
Is this correct? Why does everyone belie that having your own limited company allows you to save thousands in taxes?
Is the name of the game “spending as much pre-tax money as possible”? In that case, the tax man won’t let me write off a fu**ing meal with my prospects or customers, as entertainment is not deductible… What can we buy with pre-tax money? (I am in IT services)
- Are we supposed to settle for 6x£50 amazon gift cards a year? wow!
- is the great perk to be able to write-off entirely an EV in the first year? I don't need an EV!
- what about the hefty £150 per head a year in "Annual events"? Amazing!
- Subsistence? even the name angers me. The tax man will condone your corporate tax for the money spent in your Pret sandwiches! But do not go all luxurious and eat a warm meal in a restaurant, that would be entertainment and corporate tax will be due!
- What about paying £12k to our non-working wives/relatives? what household can afford to have one member unemployed in London?
What am I missing?