Salaries and Dividends For The 2018/2019 Tax Year

Tuesday March 13, 2018

If you operate your own UK limited company you will probably want to use the tax planning strategy of extracting money from your company through a combination of dividends and a low salary to ensure you optimise your tax.

So, how are salary and dividends taxed?

For the 2018/2019 tax year the personal allowance is £11,850 – this means your first £11,850 of income is tax free.

If your only income was your salary then any additional salary above £11,850 would be taxed at 20%, and then once you hit the higher tax band of £46,350 any additional salary would be taxed at 40%.

There are further thresholds and tax issues to be aware of but we’ll keep it simple for this article.

With regards to dividend income, the tax free dividend allowance for 2018/2019 is £2,000.

For the 2018/19 tax year, the tax on dividends is calculated as follows:

Over and above  £2,000 the dividend income is taxed as follows:

  • Any dividends in the basic tax band (£2,001 to £46,350 for 2018/2019) attract a tax charge of 7.5%
  • Dividends above the basic tax band (over £46,350) are charged at 32.5%

It might help to look at a very simple example – if your only income was dividend income – you could receive £13,850 of tax free dividend income in 2018/2019. This is due to both your £11,850 personal allowance and also the £2,000 dividend allowance.

Tax efficient dividend and salary structure

For limited company business owners, taking a low basic salary with the balance of income being taken as dividends is a common tax planning strategy.

This works as follows:

  • You take a low tax efficient salary no higher than the personal allowance so that it does not attract personal tax
  • The salary is a tax allowable cost for your business so corporation tax is saved on the gross salary
  • Any additional amounts you extract from your company (apart from expenses) are treated as dividends which do not attract national insurance
  • Dividends are not treated as a tax allowable expense (unlike a salary) so your company does not save corporation tax on the dividends.
  • Dividends can only be paid from profit made in the company, so if you do not make a profit, you can’t take dividends.

Many people choose to limit their total income to not go into the higher tax band (£46,350 for 2018/2019) so they are not taxed at the higher levels of tax, but this will be a personal choice and a balance will need to be made between tax efficiency and how much of the available profits in your business you want to extract.

Below we have outlined two salary and dividend options which are put together on the basis that you wish to stay below the higher tax band (£46,350).

We have assumed the following when preparing these calculations:

  • You are a UK resident
  • You have no student loan balance
  • Your only income is your salary and dividends from your company
  • You have a standard personal allowance
  • Your company has sufficient post tax profits to support these dividends

Option 1 –

Take a salary below the national insurance threshold of £8,424 for 2018/2019

This level of salary will not attract any personal income tax or national insurance.

For this illustration we will assume you wish to take £46,350

With regards to dividends, the higher tax band is £46,350 so assuming you want to stay in the basic tax band this leaves you with £37,950 of dividends to take.

There will be some personal tax to pay on these though – the first £2,000 is tax free (dividend allowance) but after that they are charged at 7.5% tax.

Your annual salary is £8,400 so this leaves £3,450 of dividends that can be taken tax free in the personal allowance (£11,850 less £8,400).

There will however be Corporation Tax to pay due to less salary being taken.

The next £2,000 of dividends are also tax free as they are within the dividend allowance.

This leaves the balance of dividends of £37,950 taxed at 7.5% = £2,438 of tax.

See below table for illustration:

2018 / 2019 Tax Year

£ Income

Gross salary

8,400

Dividends

37,950

Total gross income

46,350

Corporation Tax on £3,450

(656)

Tax on dividends

(2,438)

Net cash for you to keep

£43,257

 Option 2

Take an annual gross salary of £11,850 which is the standard tax free personal allowance for 2018/2019.

This level of salary will not attract any personal income tax, but it will attract some Employees National Insurance which will total £411 (rounded).

With regards to dividends, the higher tax band is £46,350 so assuming you want to stay in the basic tax band this leaves you with £34,500 of dividends to take (£46,350 less £11,850)

There will be some personal tax to pay on these though – the first £2,000 is tax free (dividend allowance) but after that they are charged at 7.5% tax.

See below table for illustration:

 

2018 / 2019 Tax Year

£ Income

Gross salary

11,850

Dividends

34,500

Total gross income

46,350

Employee national insurance

(411)

Employer national insurance

(473)

Tax on dividends

(2,438)

Net cash for you to keep

43,028

 

Please note if you have employees the employer national insurance may be different if you are able to use the £3000 allowance, and could increase your net income to £43,501

 As a further comparison if you were employed on this salary, your income and tax would be as follows;

2018 / 2019 Tax Year

£ Income

Gross salary

46,350

Personal Allowance

11,850

National Insurance

4,551

Income Tax  20%

6,900

Net income for you to keep

34,899

 

As always, if you have any questions, please talk to us at RIFT Accounting and we will help you to decide which option will work best for you.

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