Dividend, bonus, pension alternatives

Transcription

1 Dividend, bonus, pension alternatives Synopsis: This paper examines some typical calculations for 2017/18 only. Date posted: Scenario 1: One person company wanting to keep income within basic rate band: no employment available Table 1.1 Salary only ( ) Salary + dividend ( ) Gross profit 50, , Employer NICs (5,083.37) Nil Salary 45, , Corporation tax Nil (8,640.54) Dividend Nil 36, Gross income 45, , Taxable income 33,500 28,500 Employee NICs (4,420.32) Nil Income tax (6,700.00) (2,137.50) Net income 33, , In this example, the dividend route benefits from both the 5,000 dividend and the 3,336 of unused personal. Suffering 19% corporation tax on the dividend is better than no income tax, but 25.8% employer/employee NICs, of which only the employer s is tax-relieved. The extra net income comes with a greater slice of the profit. If the gross profit is kept the same for salary and dividend, the table looks like this Table 1.2 Salary only ( ) Salary + dividend ( ) Gross profit 50, , Employer NICs (5,083.37) Nil Salary 45, ,164.00

2 Corporation tax Nil (7,964.68) Dividend Nil 33, Gross income 45, , Taxable income 33,500 25, Employee NICs (4,420.32) Nil Income tax (6,700.00) (1,921.40) Net income 33, , Scenario 2: One person + single other employee company wanting to keep income within basic rate band: 3,336 of income covered by employment. Table 2.1 Salary only ( ) Salary + dividend ( ) Gross profit 49, , Employer NICs (4,623.00) Nil Salary 45, , Corporation tax Nil (7,858.02) Dividend Nil 33, Gross income 45, , Dividend Personal (5,000) (11,500) (11,500) Taxable income 33,500 28,500 Employee NICs (4,420.32) (400.32) Income tax (6,700.00) (2,137.50) Net income 33, , The bottom line is the less than in table 1.1, but the gross profit cost is lower because an extra 3,336 has been extracted as employee

3 NICable salary rather than dividend, thereby avoiding the corporation tax charge on that slice. If we repeat the calculation with the same gross profit as the salary only option, the results are Table 2.2 Salary only ( ) Salary + dividend ( ) Gross profit 49, , Employer NICs (4,623.00) Nil Salary 45, , Corporation tax Nil (7,243.37) Dividend Nil 30, Gross income 45, , Taxable income 33,500 25, Employee NICs (4,420.32) (400.32) Income tax (6,700.00) ( ) Net income 33, , Scenario 3: One person company wanting to keep income under 50,000 child benefit tax charge level: no employment available. Table 3.1 Salary only ( ) Salary + dividend ( ) Gross profit 55, , Employer NICs (5,773.37) Nil Salary 50, , Corporation tax Nil (9,813.38) Dividend Nil 41, Gross income 50, , Taxable income 38,500 33,500

4 Employee NICs (4,520.32) Nil Income tax (8,700.00) (3,762.50) Net income 36, , Again, the dividend route absorbs more ( 4,040.01) gross profit, which boosts the resulting net income (by 9,457.82). If at least employment covering 3,336 of earnings were available then, as in table 2.1, there would be a cut of in the gross profit cost for the salary + dividend option and a corresponding reduction in net benefit of due to employee s NICs. Scenario 4: One person company wanting to keep income under 100,000 personal phasing level: no employment available. Table 4.1 Salary only ( ) Salary + dividend ( ) Gross profit 112, , Employer NICs (12,673.37) Nil Salary 100, , Corporation tax Nil (21,541.78) Dividend Nil 91, Gross income 100, , Taxable income 88,500 83,500 Employee NICs (5,520.32) Nil Income tax (28,700.00) (20,012.50) Net income 65, , Again, the dividend route absorbs more ( 8,868.41) gross profit, which boosts the resulting net income (by 14,207.82). The increase is proportionately less than in the 50,000 example above because the extra 50,000 all suffers 32.5% dividend tax, after 19% corporation tax (an effective marginal rate of 45.33%). This compares with 50,000 of salary where the corresponding rate, thanks to 2% employee NIC, is only slightly more at 49.03%.

5 In additional rate tax territory, the corresponding marginal rates are 49.86% for dividend and 53.43% for salary. If at least 3,336 of employment were available then, again as in table 2.1, there would be a cut of in the gross profit cost for the salary + dividend option and a corresponding reduction in net benefit of due to employee s NICs. Scenario 5: Higher rate taxpayer with 40,000 marginal gross profits to draw and no employment available: bonus: dividend or salary? Table 5.1 Bonus ( ) Dividend ( ) Pension ( ) Gross profit 40, , , Employer NICs (4,850.62) Nil Nil Salary 35, Nil Nil Corporation tax Nil (7,600.00) Nil Dividend Nil 32, Nil Gross income 35, , , Dividend - (5,000.00) Taxable income 35, , Employee NICs (702.99) Nil Income tax (14,059.75) (8,905.00) (12,000.00) Net benefit 20, , , If there is no dividend available, then the net benefit from the dividend route falls to 21,870, only 1, more than the bonus route. The pension benefit is calculated as a UFPLS with a marginal tax rate of 40%. If the rate can be kept down to basic in retirement, the benefit rises to 34,000. Scenario 6: Basic rate taxpayer with 10,000 marginal gross profits to draw and no employment available: bonus: dividend or salary? Table 6.1 Bonus ( ) Dividend ( ) Pension ( ) Gross profit 10, , ,000.00

6 Employer NICs (1,212.65) Nil Nil Salary 8, Nil Nil Corporation tax Nil (1,900.00) Nil Dividend Nil 8, Nil Gross income 8, , , Dividend - (5,000.00) Taxable income 8, , Employee NICs (1,054.48) Nil Income tax (1,757.47) (232.50) (1,500.00) Net benefit 5, , , If there is no dividend available, then the net benefit from the dividend route falls to 7,492.50, still 1, more than the bonus route because of the impact of 12% employee s NICs.