Salary and Dividends for 2018/19

The following is for illustration purposes only and should not be relied upon for your tax planning or tax affairs. As usual we like to keep things simple, not much has change for 2018/ 2019; just a small change to the national insurance limits and the Dividend Allowance reduces to just £2,000.

 

Salary

From April 2018 (and not before) you can pay a salary of £702 / month without paying any tax or NI. If you choose this option:

• 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) through the Payroll
• 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 HMRC have been known to state that they do not have a problem with this approach

Dividends

From April 2018(and not before) 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 (which will be over £46,350 from April 2018)
• 38.1% for dividends falling within the additional rate of tax with income over £100,000 meaning restrictions on your personal allowance

 

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 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 £8,424
• 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 then give us a shout as this becomes complicated!

 

Notes

1. Dividends are paid out of after-tax profits.
2. Everyone has different tax affairs, the above is for illustration purposes only and should not be relied upon for your tax planning or tax affairs.
3. Get your calculation checked with an accountant to make sure you have a tax plan that suits you.
4. Operating as a limited company is perfectly legitimate and is purely a business choice.
5. Salary is an allowable business cost and will reduce the profit subject to corporation tax.