Transcription
Hello guys and welcome to another video. I've made, ah, it took me ages to get the spreadsheet up and running, but I think it's all working now. So I'm very, very excited to share it with you.
Well, let's start from the basics. If you just have a job, you are paying, you're getting paid. So on your pay slip, there's the, uh, gross salary. Then there's a deduction of National Insurance contribution, which is this part here. And then there's a deduction of income tax. It all comes out automatically. Goes to the government automatically. Then it says what the amount that you get in your bank is that gets transferred to you.
So if you're working, this is not very relevant. This is more if you want to get into self-employment or having your own company and being more tax efficient there. So when you're working, things automatically come out. You don't have much control, really. If you have a limited company, so for example, if you're a, a laborer, if you have some makeup business, whatever it might be, you can open up a limited company, and then the taxes work a bit differently. There is more taxes, but you have more control. You are, if it's your company, you are able to do things that you can't necessarily do with an employment.
So for a company, you have your National Insurance doubled. So you still have to pay your personal National Insurance when you take a salary. But then also when you pay yourself the salary or someone else the salary, you also pay the National Insurance called the employer National Insurance. You pay income tax on your salary when you receive it, same as a job. But also if you decide to receive a dividend, uh, together with a salary or on top of the salary, you pay a dividend tax. They all have their own calculations. They all have their own thresholds. So I've put it all into one place, one video where you can understand how most of it works. So I hope you enjoy it.
Well, let's start from the start. When you have your company, you have your National Insurance as a company. So employer National Insurance. How does it work? Well, that's this first part here. Employee National Insurance is applicable when you are making more than £5,000 a year. So if you make £5,000 or less, the employer doesn't pay National Insurance. It's 0%. But on anything above the £5k a year, the employer pays 15%. So what does that mean in, in reality? Uh, well, let's open a new sheet. Employer NI, and let's just zoom in here and let's make an example so that it's clear to you guys what that is.
So you have your, within your company, you now have, uh, say £20,000 you want to pay yourself. So what you do is you transfer it from the company account to the personal account. And when you do that, you always have to check for tax implications. So the tax implication in this case is employer NI, and as I said, £5,000, uh, NI allowance is £5,000. So NI taxable would be what you have that you want to pay yourself minus your allowance. You get taxed at 15%. So NIC employer is that times by 15%. So what that means is that you now have to send, send above to the government. You send this to the government as a tax. If you don't want to get fined, you're now left with company the amount that you wanted to send minus your National Insurance of 15% from the company. And now you send it to personal. So that means your company account goes down to zero, and your personal account is now £17,750. And now you want to spend it. But again, you have to check it because now you have to pay your personal taxes that I'm going to talk to you about later. But hopefully that makes sense.
You've got, you've made £20 grand in your company. You want to pay that to yourself and to stop and think, am I going to get some sort of tax penalty for this or or a fine? Yes, because it's over five grand you want to pay yourself. You need to pay National employer National Insurance, which has an allowance of £5 grand. So therefore, the taxable bit of this is £15 grand. Tax is 15%, which is £2.25K. Therefore, you send £2.25K from that £20 to the government. You're left with £17.75. You have now cleared your National Insurance obligation. You transfer it to yourself, and then you pay your own personal taxes on that £17.75K. So that's how employer National Insurance works. And that's the same, uh, thing is if you want to pay someone else. So if your company has £20 grand and there's an employee, your wife, for example, you want to transfer it to them, the same process applies. You still have to send that National Insurance to the, to the government, um, and then send the remainder to your wife and or whoever the employee is, and then they pay their own personal taxes, uh, once received.
Next, we have the employee National Insurance. So how that works is up to £12,576, 0%, and then between £12,576 and £50, it's 8%. So in this case, it's a small salary. So they have received it. So now they have to pay National Insurance, um, employee, um, show payable. So they received £17.75K. They want to spend it, but they need, they remember that personal taxes need sorting first to avoid any issues from the government. So you have National Insurance payable, which is, you have again, National Insurance threshold, which is £12,570, I think. Yeah, around that £12,570. So that means NI taxable will be what they've received minus that NI tax. In this case, where the threshold will be 8%. So it's this time by 0.08. So for £414.4 pounds. So now you're left with your personal account, which is that minus that. And maybe I can just put another row here. Send above to the government. So that National Insurance tax, you send it to the government. You go down to this amount. That's how National Insurance for the employee, for yourself, not the employer, but yourself works.
So you pay nothing in the first £12 grand, you pay 8% up to from £12 to £50 grand, and then above the £50 grand, you pay 2%. So what does that mean? For example, if you're getting, uh, £70,000 salary, it means that first £12 will be zero. Between £12 and £50 will be 8%, and between £50 and £70, I think, did I say £70? Between £50 and £70 will be 2%. So it's a sort of staged approach to the employee and I. So there we go. Hopefully that makes sense.
Next is we have Scotland and England in income tax. So depending on which part of the country you live in, it's different. England income tax is relatively simple. Again, first £12,500, you don't pay anything. £12k to £50k, you pay 20%. £50k to £100k, you pay 40%. Big jump. Very big hit for you there. And then over £100k, you pay 45%. So that's the, the system that they've got in England. In Scotland, it's more strict. First £12k is 0%. £12k to £15k is 19%. So really, if you're earning, I don't know, £15, £14,000, you're slightly better off because you get taxed 19 rather than 20%. However, it quickly goes up to 20 and even 21%. So very quickly as your salary gets higher, you realize that Scotland income tax brackets are worse. Then the higher rate is instead of 40%, it's actually 42%. So they hit you harder in Scotland. And then instead of it starting at £50k salary, it starts at £43k salary. So a bit of a nightmare, to be honest. Um, and then there's this intermediate one. So the 45% one, it starts at £75,000, and the additional rate is called the top rate, and that's 48%. So really, they just put extra, extra few percent and slightly lower amount everywhere. So in Scotland, they will hit you harder with tax. That's just the, the way it works.
So again, going back to the example, you have got your salary of £17,750. You pay National Insurance. Now you have your income tax, income tax payable. You have your threshold of £12,570. So you have your taxable amount of what you've received, what you received minus your threshold. And then it's £5,180. So you are £17,750. Let's have a look. So you'll be taxed partly 19%, partly 20%. Let's just make it 19.5% for the sake of this, for the simplicity of this calculation. So you have tax at this amount, taxed by 19.5%. So that's another bit of tax. So now your personal account is what it was before. It's that amount minus your income tax. Income tax £1,000. So now you're down to £16,000. And now you can spend it or do what you like with it.
So let's recap. If you do the salary, you have £20K in your company. You want to pay it yourself, but you first need to pay your National Insurance, employer National Insurance. So you do that. You're left with £17.75K. You transfer it to yourself. You sort out your personal National Insurance. In this case, it's £414. You're left with that. You sort out your income tax again on the full salary that you've received of £17.75 is that, and in the end, you're left with £16.3K. That's it. You've dealt with your company taxes. You've dealt with your personal taxes. This is your money. You can do whatever the hell you like with them. That's how it works. Uh, in here, because this £20,000 salary is very reasonable and very small, that's why you haven't been hammered that much with taxes. As you become more rich and that could potentially increase to £100,000, £200,000, you will get hit like crazy, absolutely crazy with taxes because of those brackets. So the richer get hit much harder, that's just the way it is.
So we talked about employer NI, talked about employee NI, we talked about the Scotland and England England income tax. Now the only thing that's left is dividends. So what is a dividend? Well, a salary is an expense for the company. So the company gets its money, you can then take it out as a salary, potentially bringing your overall profit down to zero, and you don't have to pay company corporation tax. A dividend is a bit differently. So again, let's open another sheet here and then I'll just type it out as I talk, just to make it easier.
So say you have your limited company where you do your business. You have your revenue, which is, I don't know, if you're a, if you're a plumber, it's all the jobs that, uh, are coming into you. You say make £130,000 for the year. You then have your expenses. So that could be buying the pipes, um, making sure your van is filled up for the, for the job. That will be, um, I don't know, buying any other potential materials that are needed. Say for that year, you spend £30,000 in expenses. So that means you're overall about £100,000. You can take that money as a salary. Then you're going to have your gross profit. T corporation tax and your net profit, or you can take out as a dividend. So potentially, if you take out £100k here, salary is also an expense. Your gross profit is zero, corporation tax is zero, your net profit is zero, and obviously the dividend, you can't pay anything yourself because you don't have anything left in the company. So your salary comes out as an expense. You have to pay National Insurance on it. But it reducing your, reduces your corporation tax down to zero.
However, if you decide to not take any salary out, salary will be zero. So that means your gross profit is going to be your revenue minus your expenses, including your salary. So you now have a gross profit of £100k. You have your corporation tax that's 19 to 25%. So on £100k, let's just average it, I don't know, let's say 21%. £21,000. So your net profit is your, that minus your corporation tax. This is an approximation because, um, the 19 to 25% corporation tax, there's, it goes up incrementally. So this is an approximation. It might be slightly more, slightly less. So your net profit is now £79,000, and you can take a £79,000 dividend. So you saw before, you took a salary of £100k, or you can take a £79,000 dividend. On a salary, you don't pay corporation tax because your corporation goes down, down, or down to zero. On a dividend, you don't pay National Insurance.
So, there's pros and cons to both. But just remember, your salary is something you take out from your company before paying corporation tax, and your dividend is something you can take out from your company after paying corporation tax. So, hopefully that makes sense. Your dividend also has thresholds. So depending on how much you get into your bank account as income for that year, your dividend thresholds are as follows. If you're falling within the basic rate, your dividend, uh, tax is 8.75%. If you fall within the higher rate, your, your, um, tax on dividends is 33.75%. Additional rate, 39.35%. Well, the key thing in here is that the basic rate for dividend is up to £50,000. So, you could potentially pay a corporation tax and then you can be paying just 8.75% to take the money out into your account, and the money is yours. So, it could potentially work, um, very, very well.
So now you know, uh, employer and I, employee and I, Scotland and England income tax, you know the dividend threshold and the tax on dividends. Now I'll explain what this spreadsheet is for. Well, in this spreadsheet, you can now think, say you're a, again, let's go back to being a plumber. You're a plumber. You think this year I will potentially be making a profit of, I don't know, it could be anything, say £30,000. Well, okay, if you make £30,000, you can take £30,000 as a salary and nothing as dividend. If you do that, you pay 29% overall tax. So that's between your employer NI, your employee NI, and your income tax, 29%. Okay. What if I try to take all as a dividend and pay and get nothing as a salary? Well, if you do that, you're actually down to 22%. So, you pay corporation tax and you pay your dividend tax, which is very reasonable on that amount of money. So, you've reduced it. Can you reduce it even further? Can you go to the limit of the salary without paying employer and I, just £5,000 and £25,000 here? Well, there you go. You've reduced it even further.
And what this lets you do is this lets you play around with the numbers. If you kind of know what the, what your profit is likely to be and how much you want to take out, you can be playing around with those numbers and this automatically calculates your employer and I, employ and I, income tax, dividend tax, and corporation tax and then add it all together and tells you how much tax you've paid overall. So, it's a very, very useful spreadsheet. It really gives you a full, full idea of how things work. And I'm more than happy to share this spreadsheet. Uh, sometimes YouTube doesn't let me put in the description, but comment below. I'm more than happy to share it. I hope you've learned a lot in this video. This is a summary of a lot of complicated topics, but I've really enjoyed making it. I'm looking forward to making more videos like this. Subscribe. Uh, press the like button because I think that's how I get more, um, algorithm recognition and more people are recommended my video. And see you in the next one. I can't wait to do the next one. Thanks, guys. See you later.