As we enter April 2019, HMRC have updated their tax rates and allowances for the coming year. That means that it is wise to adjust your salary and dividends to make full use of the newest tax free allowances and lower tax rates
What salary should I pay?
For 2019/2020 we recommend a salary of £719 per month (£8,628 per annum). At this level, you will pay no tax or national insurance.
If you pay a salary at this level you will still receive national insurance credits towards your state pension
How to maximise the use of the lower (basic) rate tax band
The dividend tax hasn’t changed much in 2019/2020 and the first £2,000 of dividends are tax free
The higher rate tax threshold now kicks in at £50,000
The personal allowance is £12,500.
Here’s the calculation/ method:
You should pay a salary of £719 per month (£8,628 per year)
You can then pay dividends tax-free for the remainder of your personal allowance and the dividend allowance, without paying any tax:
£12,500+£2,000-£8,628 = £5,872
This means a total of £14,500 can be withdrawn from the company tax-free
Between £14,500 and £50,000, your dividends will be taxed at 7.5%
So, £35,500 x 7.5% = £2,662.50
So, if you use the £719 salary and take £41,372 in dividends, you will pay £2,662.50 in tax
Please remember: Dividends are a distribution of profits after corporation tax has been paid. To pay £41,372 in dividends, your company must have made a profit of £51,500 after your £8,628 salary
What happens if I pay more out in Dividends?
Dividends between £41,372 and £91,372 are taxed at 32.5%.
Anything above that and you should speak to us about bespoke tax planning