If you operate your own UK limited company as a small business owner, you’ll often want to use the tax planning strategy of extracting money from your company through a combination of dividends and a low salary to ensure you optimise your tax. But what is the best approach?
In most circumstances the recommended approach is going to be to take a salary up to the national insurance primary threshold and take dividends thereafter.
N.b there are two national insurance thresholds to be aware of:
- Lower Earnings Limit – you need to earn a salary above this to retain your entitlement to any future state pension/benefits
- Primary Threshold – Earnings above this are subject to national insurance contributions
So ideally we want to take a salary that doesn’t exceed the primary threshold. For 2018/19 this is £162 per week, £702 per month or £8,424 per annum.
Any additional money taken from the company should be treated as dividends. For the 2018/19 tax year, the tax on dividends is as follows:
The tax free dividend allowance means that an individual’s first £2,000 of dividends are tax free.
Over and above this £2,000 the dividend income is taxed as follows:
- If you have any ‘spare’, un-used personal allowance (£11,850 for 18-19) then that part will be tax free
- Dividends thereafter, in the basic tax band (up to £46,350 for 18-19) are charged at 7.5%
- Dividends above the basic tax band (over £46,350) are subject to 32.5%
- Any dividends over and above this, in the upper tax band (£150,000 for 18-19) are taxed at 38.1%.
Ultimately the dividends you take will depend on a combination of the company position and your own personal position. You may have income for elsewhere for example. But for those director/owners with only one source of income this acts as a good guide. As always we will discuss these options in your annual accounts meeting but if you have any questions in the meantime then please don’t hesitate to contact the office.
For more information on tax bands and tax tables please download our FREE APP