Here we outline the some combination options for your salary and dividends from your limited company to make best use of the tax rates and allowances.
Details of how to make payments with HMRC are listed here.
Assumptions used:
- Tax and NI rates and allowances are as advised in the March budget
- The strategies are based on the assumption of no other income or dividends other than from your limited company – please contact us if your personal situation is different or has changed in the year
- No student loan is payable and you have the standard personal allowance available which is £12,570
- Earnings are derived from contracts outside of IR35
- Most importantly, the company has sufficient reserves/profits after allowing for corporation tax of 19% to make the dividend payments
- Option 1 and 2 Assumes there is no employment allowance available and option 3 assumes that there is sufficient Employment Allowance available to cover the Employers NI Payable on the additional amount.
Option 1 – £797 / month
Based on using up the basic rate tax threshold of £50,270 and taking a salary of £797 per month, the suggested monthly dividends for those with no other income is £3,392.16
This will give you annual figures as follows:
Salary £797 x 12 = £9,564
Dividends £3,392.16 x 12 = £40,705.92
Total = £50,269.92
This is the optimum level for an owner operated company with one person on the payroll (the director). There is a cost that should be weighed up. At this level, there will be payments due to HMRC for Employers National Insurance and this will need to be paid to HMRC in a timely manner.
Option 2 – £737 / month
Based on using up the basic rate tax threshold of £50,270 and taking a salary of £737 per month, the suggested monthly dividends for those with no other income is £3,452.16
This will give you annual figures as follows:
Salary £737 x 12 = £8,844
Dividends £3,452.16 x 12 = £41,425.92
Total = £50,269.92
This level is the level that most accountants share, the reason being that there are no Employers National Insurance payments to make and the difference between Option 1 and Option 2 in real terms is around £37 a year.
Option 3 – £1,047.50 / month
Based on using up the basic rate tax threshold of £50,270 and taking a salary of £1,047.50 per month, the suggested monthly dividends for those with no other income is £3,141.66
This will give you annual figures as follows:
Salary £1,047.50 x 12 = £12,570
Dividends £3,141.66 x 12 = £37,699.92
Total = £50,269.92
Child Benefit
If you receive Child benefit and your income is greater than £50,000 then you will have to pay a tax called “High Income Child Benefit Tax”. This is levied at 1% of the Child Benefit received for every £100 over the £50,000 threshold and would need to be added to the Self-Assessment Tax Return.
The rules are based on someone in your household receiving child benefit, the child does not need to be a blood relative of yours. High Income Child Benefit Tax can be avoided by simply reducing the March 2022 dividend payment to ensure that your total income does not exceed £50,000.
Need a little further guidance, then get in touch!