How much salary should you pay?
From 6 April 2018 (and not before) you can pay a salary of £702 per month without paying any tax or national insurance contributions (“NIC”).
If you choose this option you:
- Do get National Insurance Credits towards some benefits for example state pension.
- Must be registered as an employer.
- Have to file an RTI (real time information) return each pay period –RTI fines will apply for late filing.
No income tax or national insurance is due on a salary at this level.
This is a perfectly legal and an acceptable way of paying yourself from your company; in fact HM Revenue & Customs (“HMRC”) have been known to state that they do not have a problem with this approach.
Dividends – from April 2018
Any dividends paid over £2,000 will attract dividend tax.
The rates of tax will be:
- First £2,000 of dividends – tax free
- 7.5 % for dividends falling within basic rate tax (caution on how this is calculated)
- 32.5% for dividends falling within higher rate tax (i.e. where total income exceeds £46,350)
- 38.1% for dividends falling within the additional rate of tax with income over £150,000.
How to work out your dividend tax
The calculations assume that you have no other income.
You would pay a salary of £702 x 12 from the company = £8,424
You can then pay £2,000 plus the remainder of your personal allowance as dividends without any tax = £2,000 + (£11,850 personal allowance less the salary of £8,424) = £5,426.
So a total of £13,850 will be tax free (dividend allowance + personal allowance).
Note – this is per person.
You will pay tax after £13,850!
Tax at 7.5%
For the next £32,500 of income you will pay tax at 7.5%.
So you can take:
- a salary of £8,424
- dividends of £5,426 + £32,500 = £37,926
Total income of £46,350
Dividend tax due on this will be (£32,500 x 7.5%) £2,437.50
Tax at 32.5%
Dividend income over £37,926 will attract tax at 32.5%.
If your income exceeds £100,000 your personal allowance is restricted by £1 for every £2 of income over £100,000 and so will reduced to nil at an income level of £123,700.
Dividend tax rule of thumb
The dividend tax rule of thumb to use is:
- take a salary of £8,424
- tax free dividends of £5,426 to use up the remainder of your personal allowance
- £75 of tax per £1,000 of dividends from £5,427 up to total dividends of £37,926
- £325 of tax per £1,000 of dividends over £27,927
If your income exceeds £100,000 obtain a personalised quotation as it gets really complicated!
Payments on Account and the new Dividend Tax
The dividend tax puts most people into payments on accounts.
- Dividends are paid out of post tax profits.
- 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.
- Salary is an allowable business cost and will reduce the profit subject to corporation tax.
- Everyone has different tax affairs; this fact sheet is for illustration purposes only and should not be relied upon for your tax planning or tax affairs.
- We recommend that you seek the advice from a qualified accountant before making any tax planning decisions to ensure you have a tax plan that suits you.