Setting the right salary and dividend structure for your business is always something best discussed with your accountant who will be familiar with your personal circumstances. The following can be used as a guide to help you think about the salary you should pay in 2017 and how much tax you will pay on your dividends
What salary should you pay?
Primarily because the Government has abolished the employment allowance for sole director limited companies the setting of your salary can be kept simple. Taking in account the tiny change in national insurance limits for 2017/18 a salary of £680 per month can be paid without attracting tax or NI.
At this level of salary:
- You get National Insurance Credits towards some benefits e.g. state pension
- You must be registered with HMRC as an employer
- You must file RTI (real time information) returns each pay period; fines will be imposed for the late filing of a return
How much tax will you pay on dividends?
Since the introduction of the dividend tax in April 2016 any dividends taken over £5,000 will attract dividend tax. As an aside, the Government are proposing that the £5,000 tax free dividend allowance be reduced from April 2018 but this has yet to become law.
Dividends now attract tax at the following rates:
- The first £5,000 of dividends is tax free
- Dividends falling within basic rate tax will be taxed at 7.5%
- Dividends falling within higher rate tax will be taxed at 32.5%
- Dividends falling within the additional rate of tax - 38.1% but remember that for income over £100,000 your personal allowance starts to get restricted
How to calculate your dividend tax
Let’s start by assuming that you have no other income and that you’re paying yourself a salary of £680 x 12 from the company = £8,160; of course more dividend tax will be due if you have any other income such as rental income, interest etc.
You can pay £5,000 plus the remainder of your personal allowance as dividends without any tax.
Here’s the maths...
So that’s £5,000 (being the dividend allowance) + (£11,500 personal allowance less the salary of £8,160) = £8,340.
That’s a total of £16,500 tax free (dividend allowance + personal allowance).
Note - this is per person (consider spouse taking an income or some dividends especially if they do not work elsewhere but always get advice from an accountant first before doing this).
After that you will pay tax!
Again, just to state that these calculations assume that you have no other income.
Tax at 7.5%
Tax at 7.5% will be paid on the next £28,500 of income.
So you can take
- a salary of £8,160
- dividends of £8,340 + £28,500 = £36,840
- Total income of £45,000
- Dividend tax of £28,500 x 7.5% = £2,137.50
Note - in this example dividend over £8,340 will attract 7.5% tax ie £75 per £1,000 of dividends
Tax at 32.5%
Dividend income over £36,840 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
So to re-iterate the dividend tax rule of thumb is:
- take a salary of £8,160
- tax free dividends of £8,340
- £75 of tax per £1,000 of dividends from £8,341 up to total dividends of £36,840
- £325 of tax per £1,000 of dividends over £36,841
- If your income exceeds £100,000 obtain a personalised quotation as it gets really complicated!
Pay more tax if living in Scotland
If you live in Scotland and you’re a higher rate tax payer then you will pay more tax than if you lived in England, Wales or Northern Ireland. This applies even if you earn your income in the rest of the UK or even if you have a company registered in England and Wales or Northern Ireland.
If the income subject to the higher rate of tax is received through anything other than dividends a resident of Scotland will pay £400 more a year.
If your income subject to the higher rate of tax comes from dividends the amount of extra income tax due will be £500 a year.
Payments on Account and the new Dividend Tax
If you were in receipt of dividends at an amount below the higher rate threshold, until April 2016, you would have paid no further tax. However since the introduction of the dividend tax more people will need to make a payment on account. You’ll make a payment on account (POA) if your tax bill is more than £1,000. The POA is an amount paid towards the tax due in your current tax year.
If this extra dividend tax bill exceeds £1,000 then not only will you have to pay that but you’ll also have to make two payments on account; 50% of the tax bill on the 31 January and 50% of the tax bill on 31 July. In reality this means that your tax bill on 31 January will be 150% (less any previous payments on account). Payments on account do seem to confuse many; if in doubt check out the explanation on the GOV.UK website or ask your accountant to explain them.
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. Always seek the advice of a suitably qualified accountant before making any tax planning decisions.