Prepare and figure out the most tax-efficient way to draw a maximum income from the company is the big task at hand for every limited company owner/director.
There are a few options available to you. One is to pay yourself a salary. A second one is to make money in the form of dividends. A third one is the mixture of the two.
Of course, these levels fluctuate depending upon your income and your circumstances. However, the best way will be unique to you and your company.
In this article, we will explain to you how to set your optimum salary level, what dividends are, and how they are taxed.
Let’s begin crafting the most robust tax plan which will help you extract fortune from your company.
What should be my salary?
It is worth drawing a salary from your company as this cost gets deducted against the company’s Corporation Tax bill.
The tax threshold for different salaries is as shown in the table below:
From April 2019(not before) you can have a salary for yourself of £719 / month. On this figure, you needn’t pay any tax or NI.
Choosing this option comes with the following gains and requisites:
- You get National Insurance Credits towards some benefits such as state pension.
- You must be registered as an employer
- You need to file an RTI (Real Time Information) each pay period. Late filing may charge RTI fines
- There should not be any Income Tax or National Insurance due on this salary slab.
- It is a legal and acceptable way of paying yourself from your company. Additionally, HMRC is known for stating that they do not have any issue with this approach.
There’s one more scenario to this:
Claiming the Employment Allowance: – £12,500 salary
There are some conditions: if you are not caught by IR35, and not the only director/employee of your company who is earning over the secondary threshold, it may prove to be a tax-efficient sum to pay yourself and claim the Employment Allowance EA.
- It’s crucial to first check whether your company is eligible for EA.
- You need to pay employees’ NICs on salaries over £8,632
- If you pay yourself £12,500 in this financial year, there’s no income tax on this salary, plus the salary is deductible against your organisation’s Corporation Tax bill. Also, you’ll pay £464.16 in employees’ NICs.
- A total amount of £533.78 employers’ NICs get refunded via EA. However, if you are the only director of the company, and there are no other employees, you cannot claim the EA.
- If you go for £12,500 salary rather than £8,632, your company saves £734.92 in Corporation Tax.
- You will also be able to make a sum around £271 per year through corporate and personal tax savings with £12,500 salary.
All in all, this salary looks genuinely promising this year if you are eligible to claim the EA.
Contact us today to check your eligibility for Employment Allowance EA.
What about the dividends?
After finalising the salary, it’s time to work on drawing down remaining income, and the answer is dividends. Dividends work differently than Pay-As-You-Earn – PAYE. They are not liable for any National Insurance. Furthermore, they cost less income tax than a salary. All these factors make dividends an attractive option for limited company directors.
Tax allowance for dividends:
Working out your dividend tax:
Assumption: There’s no other income apart from the salary.
You are paying yourself a salary of £719 x 12 from the company = £8,628.
Here’s an equation:
You can then pay£2,000 + the remainder of your personal allowance as dividends (with no tax) = £2,000 + (£12,500 personal allowance minus the salary of £8,628) = £5,872
So £14,500 becomes tax-free. (Dividend allowance + personal allowance)
Note: This is per person.
You start paying tax after £14,500 – tax at 7.5%
The tax rate will be 7.5% for the next £35,500 of income.
- A salary of £8,628
- Dividends of £5,872+£35,500 = £41,372
- Adding one and two, we get a total income of £50,000
- Dividend tax due on this income is £35,000*7.5% = £2,662.50
Tax at 32.5%
All the dividend income over £41,372 will be taxed at 32.5%
What to opt for – salary or dividends?
Each business scenario is different, and each contractor’s circumstances are different. Selecting a payment method for yourself depends on the level of income, professional circumstances, and the tax bracket in which you fall.
Despite that, paying in the combination of dividends and the salary is a majorly popular phenomenon. It is considered to be the most tax-efficient way of working. Contractors pay themselves salary up to tax-free allowance, and the rest is recovered from the dividends.
We would like you to take notes of the following important points:
- Dividends are paid on post-tax profits.
- This guide is for your quick understanding. We recommend consulting with Easy Tax or your current accountant before finalising any tax planning.
Making a smart tax plan is a time-consuming job. Why not leave it to us while you focus on your company and its growth?
We, at Easy Tax, are a team of enthusiastic and professional accountants in the UK who strive to provideaffordable accountancy to businesses, landlords, self-employed people and employees.
We efficiently plan taxes for company owners, allowing them to receive the maximum sum possible through dividends and salary.
Contact us today for queries, assistance and service.