Directors Salary and Dividend 2017/18
For the 2017/18 tax year the personal allowance is £11,500.
If your only income through PAYE was your company director salary, then any additional salary above £11,500 would be taxed at 20%, and once you hit the higher tax band of £45,000, any additional salary would be taxed at 40%. Check out the tax bands on HMRC website.
With regards to dividend income, from 6th April changes have been made, and a new dividend allowance has been implemented.
For the 2017/18 tax year dividends are taxed as follows:
- The dividend allowance means that an individual’s first £5,000 of dividends are tax free.
Over and above this £5,000 the dividend income is taxed as follows:
- If you have any un-used personal allowance then that element is tax free
- Any dividends up to £45,000 for 17-18 attract a tax charge of 7.5%
- Dividends above £45,000 are charged at 32.5%
- Additional rates of tax will apply and personal allowance will be reduced if you declare more than £100,000 in the tax year.
Let’s look at a couple of scenarios below;
- If your only source of income is dividend, you could receive £16,500 of tax free dividend income in the 17-18 tax year. This is made up of your £11,500 personal allowance and the £5,000 dividend allowance. Any dividend withdrawn from £16,500 to £45,000 will be taxed at 7.5% and any dividend from £45,000 to £100,000 will be taxed at 32.5% without losing your personal allowance. (please see chart below for illustration purposes).
- You pay yourself the lowest possible salary to avoid national insurance but enough to be entitled to state pension (£680 per month, £8160 per year) tax free. Then pay yourself a dividend of £8,340 tax free. This takes advantage of the £11,500 personal allowance and the £5000 tax free dividend income. By putting through £8160 as salary, you also receive a 19% corporation tax deduction for the expense through your Company. Any dividend withdrawn from £16,500 to £45,000 will be taxed at 7.5% and any dividend from £45,000 to £100,000 will be taxed at 32.5% without losing your personal allowance. (please see chart below for illustration purposes).
If your salary is above £100,000 we have some clever ways to help you reduce your tax liability! Contact us for further information.
|Example 1||Example 2|
|Gross salary||£ 8,160||£0|
|Total Gross Income||£45,000||£45,000|
|Less: Tax on dividends||£ 2,138||£ 2,138|
|Net cash in pocket||£42,862||£42,862|
|Corporation tax saved on gross salary||£ 1550.40||£ 0|
|Theoretical cash in pocket||£44,412.40||£42,862|
*these figures assume there are no additional sources of income.
If you are a SRK customer with any questions regarding this, please get in touch with your dedicated associate or contact firstname.lastname@example.org. If you are not a customer of SRK but would like additional information or if you looking for a Xero Accountant in London or a QuickBooks Accountant in Birmingham, please get in touch for a free consultation.
Thanks for reading! If you have any comments, please submit them below.