As you’ll already know, the most tax efficient way of paying yourself from your company…
As we are entering a new tax year, I wanted to share with you the most tax efficient pay rates for directors.
As you already know, the dividend tax has been implemented from April 6th this year. This does complicate things, so please feel free to email us if you need clarification.
Even with the introduction of the dividend tax, it is still much more tax efficient to pay directors a low salary and take the rest of their remuneration using dividends. This strategy does depend on the company making sufficient profits to pay a dividend. You should always make sure that your company has made enough profit and provided for the corporation tax on that profit, before taking a dividend.
The advice in this email doesn’t take into account any complicated personal circumstances. I’ve assumed that the director receives no other income apart from income from their Limited Company (I.e. we haven’t taken into account any pensions, salary or rental income etc.)
The annual personal allowance has been raised to £11,000. This means that you can earn £11,000 without paying any tax.
However, the national insurance threshold hasn’t been raised from £8,060. So, if you take a salary of between £8,060 and £11,000, you’d pay no tax, but would pay national insurance.
For that reason, we are recommending that directors keep their salaries at £671.67 a month in 2016/2017
Dividends are still the most tax efficient way of taking the rest of your remuneration.
If you use our recommended salary then you can take a further £7,940 in dividends without paying any tax (This is the sum of the £5,000 dividend allowance plus your unused personal allowance)
In previous years, you have been able to take a maximum of £30,874 without paying any tax. Taking the same amount in 2016/2017 will now cost £1,720 in tax.
However, there is some good news. The previous “grossing up” of dividends (the confusing 100/90 calculation) has now been scrapped. That means you can take out a further £4,000 at basic rates.
The maximum dividend you can withdraw at basic rate tax is £34,940.
This level of dividend will cost you £2,025 in tax (last year the same level would have cost you £1,011).
If you take the advised salary of £8,060 and the maximum basic rate dividend of £34,940, you will end up with £40,975 in your pocket after tax.
Any additional dividends you take over £34,940 will be taxed at 32.5% up to £92,000 of dividends. If you are likely to earn over £100,000 next year then you will need to talk to us separately as it’s much more complex!
A Note on Tax Payments
When you incur a personal tax bill of over £1,000 you are required to make a “payment on account” towards the following tax bill. This is calculated as 50% of your current bill. You therefore need to be prepared that in January 2018 your total tax payment to HMRC will include a further 50% towards the following years tax bill. If you take the maximum personal band dividends, then this will amount to a further £,1012.50 on top of the £2,025. This isn’t additional tax, but is a timing difference.