Here we outline the suggested combination of salary and dividends from your limited company to make best use of the tax rates and allowances.
If you are looking at taking alternative combinations of salary and dividends, additional tax and NI will be due.
Tax will be payable on all dividends in excess of £2k so you should ensure you make sufficient provision to pay this additional tax by making regular payments to HMRC throughout the year.
Details of how to make payments with HMRC are listed here
- Tax and NI rates and allowances are as advised in the Nov 18 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 £12,500
- 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
- The combination of the increased personal allowance and higher rate tax threshold means that an extra £3,650 now falls within the basic rate band producing a tax saving of £730 per year
- Your personal savings allowance is £1,000 (£500 for higher rate tax payers). This means you will not pay tax on interest received up to this amount
- If your spouse is not able to use all of their tax free personal allowance, they can opt to transfer up to 10% of this to you. Details of how to apply are here
- There has been no change to the trigger level for auto enrolment so this remains at £10,000
- The £3k employment allowance remains – this reduces the liability to employer NI where there is more than one employee earning at or above £166 per week £719 per month). Single director companies or those with employees below this level do not benefit from this allowance.
What are my options?
Option 1 Sole director or sole employee
As no employer allowance is available to offset employer NI, it is advisable to take a salary which falls below the threshold at which this would be payable.
We advise a monthly salary of £719 which equates to £8,628 per annum.
At this suggested rate, you will still receive your NI credit for state pension and benefits.
This option is also beneficial for those who have additional income say from property rental as there is £3,872 remaining from your personal allowance which can be used to offset these earnings.
Based on using up the basic rate tax threshold of £50,000, the suggested combination for those with no other income is £719 monthly salary and monthly dividends of £3,447.66.
At these levels, there will be personal tax payable of £2,662.50 so roughly £222 should be saved each month to cover this or paid direct to HMRC.
For those with other income, do contact us directly with your estimated income from each source and we will provide you with some additional thoughts.
Option 2 More than one employee and earning above £8,628 (£719 per month)
Under this option, directors can take the full £12,500 as salary which equates to £1,041.66 per month and pay a small amount of employee NI to HMRC over the months of Dec 19 – March 20 of £464.
Total suggested extraction would be salary of £12,500 and dividends of £37,500 – so £3,125 per month in dividends and £1,041.66 as salary.
Under this option there is an overall saving after taking into account saving in corporation tax on the higher salary of £271.
At this salary, auto enrolment would be triggered so you will need to ensure you have set this up and registered your compliance with the Pensions Regulator. We can help with meeting these responsibilities so do contact us if you require assistance.
Do let us know if you have any queries on this. We will be contacting all our clients shortly