Looking for advice on profit extraction from your limited company? You’re a director and want to take a salary and dividends but are not sure of the current tax implications? We have put together a handy guide to help clarify
This guide is just that, it’s generic and so should only be used as an example – please consult your accountant for your tax planning.
For 2018/ 2019; there is a small change to national insurance limits and the Dividend Allowance has reduced to £2,000.
The salary amount that means you don’t pay any tax or NI from April 2018 is £702 per month.
For this to work, you will need to be registered as an employer and file an RTI (real-time information) return for each pay period. If you use a cloud accounting software this is a very simple process. This is acceptable to HMRC and is a perfectly legitimate approach. You will also get some National Insurance Credits – e.g towards State Pension.
From April 2018, any dividends over £2,000 are subject to tax; as follows:
First £2,000 of dividends – tax-free
- 7.5 % on dividends from £2000 – £46,350 (basic rate)
- 32.5% on dividends from £46,350 – £100,000 (higher rate)
- 38.1% on dividends over £100,00 (additional rate – your personal allowance is restricted and so you’ll need to seek advice from your accountant at this point)
So let’s calculate the tax on dividends
£702 x 12 from your company salary = £8,424
The first £2000 is tax-free
The rest of your allowance is then tax-free (£11,850 – £8,424) £3,426
Total tax-free allowance on dividends is therefore £5,426
The 7.5% tax rate
So in this example from £5,426 + £32,500 of dividend income, you will pay tax at the rate of 7.5%.
So this is how it looks:
- £8,424 salary
- £5,426 + £32,500 = £37,926 dividends
- Total income: £46,350 (the lower tax bracket limit)
- Total tax on dividends (£32,500 x 7.5%) £2,437.50
The 32.5% tax rate
When your dividends exceed £37,926 you will pay 32.5% in tax.
Here’s another way of looking at it:
- Salary: £8,424
- Use up the remainder of personal allowance: £5,426
- Dividend tax: £75 tax for every £1,000 from £5,427 up to a total of £37,926
- £325 tax for every £1,000 over £37,926
Taking more than £100,000?
At this point, things get a bit more complicated and so you’ll need to get personalised advice based on your own situation. Ask your accountant or get in touch.
Important: This example has been put together to give you guidance but should not be used for tax planning purposes. It assumes there is no other income to consider and doesn’t account for any personal or other business circumstances that could impact your calculations. Get in touch with your accountant or give us a call for more information.