Directors Salary and Dividend 2019/20
As a business owner it is essential you are aware of changes made to Directors Salary and Dividends each tax year. The current tax year is from 6 April 2019 to 5 April 2020. This blog covers the significant changes you should be aware of. However, you should always contact your accountant for complex payment structures to ensure you are being as tax efficient as possible.
For the 2019/20 tax year the personal allowance is £12,500.
If your only income through PAYE is your company director salary, then any additional salary above £12,500 would be taxed at 20%, and once you hit the higher tax band of £50,001 (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, dividend allowance remains at £2,000.
For the 2019/20 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 unused personal allowance, then that element is tax free
- Any dividends up to £50,000 attract a tax charge of 7.5%
- Dividends above £50,000 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 £14,500 of tax-free dividend income in the 2019-2020 tax year. This is made up of your £12,500 personal allowance and the £2,000 dividend allowance. Any dividend withdrawn from £14,500 to £50,000 will be taxed at 7.5% and any dividend from £50,000 to £100,000 will be taxed at 32.5% without losing your personal allowance (please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 (£719 per month, £8,632 per year) tax free. Then pay yourself a dividend of £5,868 tax free. This takes advantage of the £12,500 personal allowance and the £2,000 tax free dividend income. By putting through £8,632 as salary, you also receive a 19% corporation tax deduction for the expense through your company. Any dividend withdrawn from £14,500 to £50,000 will be taxed at 7.5% and any dividend from £50,000 to £100,000 will be taxed at 32.5% without losing your personal allowance (please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! On average we save our clients between £5,000 and £50,000 in tax. Get a free tax review today to find out how much you could be saving.
Total Gross Income
Less: Tax on dividends
Net cash in pocket
Corporation tax saved on gross salary
Theoretical cash in pocket
*these figures assume there are no additional sources of income.
All GrowFactor clients should contact email@example.com with Director Salary and Dividend queries. If you are not yet a GrowFactor client and need better financial clarity, book in for a free strategy session with a senior GrowFactor Chartered Accountant.