Directors Salary and Dividend 2018/19
The current tax year is from 6 April 2018 to 5 April 2019 – ensure you know the changes to directors salary and dividends.
For the 2018/19 tax year the personal allowance is £11,850.
If your only income through PAYE was your company director salary, then any additional salary above £11,850 would be taxed at 20%, and once you hit the higher tax band of £46,351 (including the personal allowance), 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 2018/19 tax year, dividends are taxed as follows:
- The 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 un-used personal allowance then that element is tax free
- Any dividends up to £46,350 for 17-18 attract a tax charge of 7.5%
- Dividends above £46,350 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 £13,850 of tax free dividend income in the 18-19 tax year. This is made up of your £11,850 personal allowance and the £2,000 dividend allowance. Any dividend withdrawn from £13,850 to £46,350 will be taxed at 7.5% and any dividend from £46,350 to £100,000 will be taxed at 32.5% without losing your personal allowance (please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 (£702 per month, £8,424 per year) tax free. Then pay yourself a dividend of £5,426 tax free. This takes advantage of the £11,850 personal allowance and the £2,000 tax free dividend income. By putting through £8,424 as salary, you also receive a 19% corporation tax deduction for the expense through your Company. Any dividend withdrawn from £13,850 to £46,350 will be taxed at 7.5% and any dividend from £46,350 to £100,000 will be taxed at 32.5% without losing your personal allowance (please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||£ 8,424||£0|
|Total Gross Income||£46,350||£46,350|
|Less: Tax on dividends||£ 2,437.5||£ 2,437.5|
|Net cash in pocket||£43,912.50||£43,912.50|
|Corporation tax saved on gross salary||£ 1,600.56||£ 0|
|Theoretical cash in pocket||£45,513.06||£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.
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