As April approaches, it’s the time of year to review your tax efficient remuneration strategy for the next financial year.
How much salary should you pay?
There’s not much change to the allowances in 2018, so from April 2018 you can pay a salary of £702 (£8,424 per year), without paying any NI or tax.
By paying this amount:
- You do get National Insurance Credits towards your State Pension
- You will not pay any tax or National Insurance (and will have some allowance left for some tax-free dividends)
What’s the score with Dividends?
In 2018/2019, you have a reduced dividend allowance of £2,000. This means you can receive a total of £2,000 without paying any tax.
In addition, you will also have the remainder of your personal allowance available tax-free (£11,850- £8424 = £3,426)
So, in total, you can take (£3,426+£2,000)= £5,426 tax-free in dividends
How to avoid the higher rate tax charge
Once you’ve taken all your tax-free salary & dividends, the next £32,500 of dividends will be taxed at 7.5%
To stay within the basic rate tax band, you can pay yourself as follows:
Salary – £702
Dividends (£54,26+£32,500 / 12) – £3,160
Total = £3,862 per month (meaning £46,350 per year)
At this level, your tax bill will be £2,437.50, for the year. You’ll need to save £203 a month to cover this. Also be aware of payments on account which might make this bill higher (take a look here to see how payments on account are calculated).
The higher rate tax charge
Above this level of income, your dividends will be taxed at 32.5% all the way up to £100,000 of earnings. That means for every £1,000 you take from the business, you’ll need to put £325 aside for tax.
Once you go over £100,000 it gets even more complicated as you start to lose your personal allowance.
However, it’s not all bad news. We’ve put together a number of tips that you can use to reduce the tax bill. Hop on over here, to read what they are.
We understand that everyone has different tax affairs and this post should be used for illustration purposes and a guide only. For specific advice relating to your individual circumstances, you can contact us and we’d be happy to help