As a limited company owner, there are certain ways in which to take money from your company in salary and dividends, maximising on your untaxed allowances. With the beginning of a new tax year, there are combinations of salary and dividends that will make the most sense for you and save you the most money.
What are dividends?
‘Dividends’ is the name given to money paid out to investors who own shares in a company. Dividends are the distribution of a company’s profits. As a company director, you have shares in your company and may take dividends – these are taxed differently to your salary.
New tax rates:
Every tax year, tax rates are subject to change and fluctuation. It is important to know the new rates when drawing a salary and/or dividends.
For 2019/20, personal allowance (tax free earnings) has increased from £11,850 to £12,500 and the basic rate limit has increased to £37,500 – as a result, the higher rate threshold will be £50,000.
Dividend allowance remains at £2,000 and any dividends in excess of that will be taxed.
- You won’t pay tax if your unused personal allowance covers the additional dividend taken
- Dividends in the basic rate tax band will be taxed at 7.5%
- Dividends in excess of basic rate tax band will be taxed at 32.5%
- Dividends within the additional rate band (income over £150,000), will be taxed at 38.1%
Most company directors will opt to pay themselves enough of a salary to satisfy their National Insurance stamp. Additional funds are then taken as dividends for maximum tax efficiency. When paying corporation tax, your company will save 19% on any salary taken. The director then takes dividends, which don’t technically save on corporation tax, as they are declared after tax – but they do save on National Insurance as dividends are NI exempt.
Best Combination: Example 1
If you cannot claim Employment Allowance –
In order to register as paying National Insurance, you need to be earning over the primary threshold – which is £8,632 for tax year 2019/20.
If you pay yourself a salary of £8,632, you can then take dividends of up to £41,386. (Which is within the basic rate band of £50,000). These dividends will incur £2,663 of tax.
Overall, you’ll take home £47,337 after tax – with a saving of £1,640 in corporation tax.
Best Combination: Example 2
If you can claim Employment Allowance –
There is a little more administrative effort involved in this process, but you’ll still save money.
If you pay yourself a salary on £12,500, you would usually have to pay employers National Insurance – at £533.78. With taking £12,500 in salary, your Employment Allowance cancels out your employers National Insurance contribution. You will still have to pay employee’s National Insurance at the lower rate of £464.16. Leaving you £270 better off.
With taxed dividends of £50,000, you’ll take home £55,310.84 after tax.
You can gain an estimation of your own personal dividend tax, using tools such as the Which? Tax Calculator. Please remember that these tools are designed as a guide.
If you’d like to know more about how you can maximise your earnings and take advantage of tax efficient banking, please get in touch today.
The information contained in this website is for general information purposes only. The information is provided by GHawk Accounting and while we endeavour to keep the information up to date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the website or the information, products, services, or related graphics contained on the website for any purpose. Any reliance you place on such information is, therefore, strictly at your own risk and we accept no liability for action taken upon recommendations made in on this website.