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Directors Salary and Dividend 2017/18

by | May 4, 2017

Directors Salary and Dividend 2017/18


director salary

 

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;

  1. 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 Any dividend withdrawn from £16,500 to £45,000 will be taxed at 7.5% and any dividend from £45,000 to £100,000 will be taxed at 32.5% without losing your personal allowance.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).

     

  2. 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 Any dividend withdrawn from £16,500 to £45,000 will be taxed at 7.5% and any dividend from £45,000 to £100,000 will be taxed at 32.5% without losing your personal allowance.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.

dividend allowance

 

 

Example 1

Example 2

Gross salary

£  8,160

£0

Dividends

£36,836

£45000

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 support@srkaccounting.com.  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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