Our Salary and Dividend factsheet gives details of our recommendations for taking a salary and dividends from your limited company. Everyone is different - the solution given here is generic and may not be suitable for your circumstances, especially give the change in dividend tax this year.
Please contact your accountant to discuss your specific circumstances.
This factsheet is for illustration purposes only and should not be relied upon for your tax planning or tax affairs.
How much salary should you pay?
Unlike previous years, this year we are keeping things simple; primarily because the Government has abolished the employment allowance for sole director limited companies.
So this year we have just one option.
As there is no change in the national insurance limits for 2016 / 2017 the basic salary remains the same as last year.
So from April 2016 you can pay a salary of £671 / month without paying any tax or NI.
If you choose this option you:
- You do get National Insurance Credits towards some benefits for example state pension
- You must be registered as an employer
- You have to file an RTI (real time information) return each pay period - remember there are fines if you file the RTI return late
- No income tax or national insurance is due on the monthly salary payment
- This is a perfectly legal and an acceptable way of paying yourself from your company
This is now complicated by the introduction of the dividend tax.
We are doing a series of blogs on this including one with some hints and tips of how to minimise the impact of the dividend tax (see our blog for more).
Any dividends paid over £5,000 will attract dividend tax.
The rates of tax will be:
- First £5,000 of dividends - tax free
- Dividends falling within basic rate tax (caution on how this is calculated) - 7.5%
- Dividends falling within higher rate tax - 32.5%
- Dividends falling within the additional rate of tax - 38.1% but remember that for income over £100,000 your personal allowance starts to get restricted
How to work out your dividend tax
This guidance assumes that you have no other income. More dividend tax will be due if you have any other income such as rent, interest etc.
You would pay a salary of £671 x 12 from the company = £8,052
You can then pay £5,000 plus the remainder of your personal allowance as dividends without any tax = £5,000 + (£11,000 personal allowance less the salary of £8,052) = £7,948.
So a total of £16,000 will be tax free (dividend allowance + personal allowance).
Note - this is per person (consider spouse taking an income or some dividends especially if they do not work elsewhere).
After that you will pay tax!
Again, just to state that these calculations assume that you have no other income.
Tax at 7.5%
For the next £27,000 of income you will pay tax at 7.5%.
So you can take
- a salary of £8,052
- dividends of £7,948 + £27,000 = £34,948
- Total income of £43,000
- Dividend tax of £27,000 x 7.5% = £2,025
Note - in this example dividend over £7,948 will attract 7.5% tax i.e. £75 per £1,000 of dividends
Tax at 32.5%
Dividend income over £34,948 will attract 32.5% tax.
If your income exceeds £100,000 you should obtain a personalised illustration as your personal allowance is restricted at that level.
Dividend tax rule of thumb
The dividend tax rule of thumb to use is:
- take a salary of £8,052
- tax free dividends of £7,948
- £75 of tax per £1,000 of dividends from £7,949 up to total dividends of £34,948
- £325 of tax per £1,000 of dividends over £34,949
- If your income exceeds £100,000 obtain a personalised quotation as it gets really complicated!
Tax is flipping complicated - isn't it?!
The next thing for you to do is agree the most appropriate structure for you with your accountant. They will be able to advise you based upon your specific circumstances.
Everyone has different tax affairs; this factsheet is for illustration purposes only and should not be relied upon for your tax planning or tax affairs.
Get your calculation checked with your accountant to make sure you have a tax plan that suits you.
Failure to process your payroll and submit the correct RTI (Real Time Information) returns could result in fine or penalties.
Disguised employment issues aside, operating as a limited company is perfectly legitimate and is purely a business choice.
We strongly recommend that you seek the advice of a suitably qualified accountant before making any tax planning decisions.
The salary is an allowable business cost and will reduce the profit subject to corporation tax.
Dividends are paid out of post tax profits.
Remember that dividends do not attract national insurance and so are a more tax efficient way of extracting profit from your business.