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 given the change in dividend tax introduced in April 2016.
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?
Just like last year we are keeping things simple; primarily because the Government has abolished the employment allowance for sole director limited companies.
There is a tiny change in the national insurance limits for 2017 / 2018.
So from April 2017 you can pay a salary of £680 / 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
As before this is now complicated by the introduction of the dividend tax.
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 rental income, interest etc.
You would pay a salary of £680 x 12 from the company = £8,160
You can then pay £5,000 plus the remainder of your personal allowance as dividends without any tax = £5,000 + (£11,500 personal allowance less the salary of £8,160) = £8,340.
So a total of £16,500 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 but always get advice from an accountant first before doing this).
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 £28,500 of income you will pay tax at 7.5%.
So you can take
- a salary of £8,160
- dividends of £8,340 + £28,500 = £36,840
- Total income of £45,000
- Dividend tax of £28,500 x 7.5% = £2,137.50
Note – in this example dividend over £8,340 will attract 7.5% tax i.e. £75 per £1,000 of dividends
Tax at 32.5%
Dividend income over £36,840 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 £8,160
- tax free dividends of £8,340
- £75 of tax per £1,000 of dividends from £8,341 up to total dividends of £36,840
- £325 of tax per £1,000 of dividends over £36,841
- If your income exceeds £100,000 obtain a personalised quotation as it gets really complicated!
Additional Tax if you live in Scotland
If you live in Scotland and you are a higher rate tax payer you will pay more tax than if you lived in England, Wales or Northern Ireland.
That applies even if you earn your income in the rest of the UK or even if you have a company registered in England and Wales or Northern Ireland.
If the income subject to the higher rate of tax is received through anything other than dividends and savings interest a resident of Scotland will pay £400 more a year.
A Scottish resident will have to do a parallel tax calculation for dividends, savings and gains using the tax bands for the rest of the UK –who said tax isn’t taxing?
You can see an example of this on the web site of the Chartered Institute of Taxation:
Payments on Account and the new Dividend Tax
A payment on account is an amount paid towards the tax due in your current tax year.
You’ll make a payment on account if your tax bill is more than £1,000.
The new dividend tax has put many more into the payments on account regime than before.
If you were in receipt of dividends at an amount below the higher rate threshold, until April 2016, you would have paid no further tax.
As we know that all changed from April 2016; those with dividends under the higher rate threshold now have to pay 7.5% dividend tax, after taking into account dividend and personal allowances of course.
If this extra tax bill exceeds £1,000 then not only will you have to pay that but you’ll also have to make two payments on account; 50% of the tax bill on the 31st January and 50% of the tax bill on 31st July.
In reality this means that your tax bill on 31st January will be 150% (less any previous payments on account).
Payments on account seem to confuse many; if in doubt ask your accountant to explain them or check out the explanation at https://www.gov.uk/understand-self-assessment-bill/payments-on-account
Tax is flipping complicated – isn’t it?!
We strongly recommend that you agree the most appropriate structure for your circumstances 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. We recommend that you seek the advice of a suitably qualified accountant before making any tax planning decisions. Please do check accountancy qualifications; anyone can call themselves an accountant.
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.
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.