This Essentials Guide outlines the most tax efficient salary and dividend structure for the 2018/19 tax year (6th April 2018 to 5th April 2019).
How are salary and dividends taxed?
The standard tax free personal allowance for the 2018/19 tax year is £11,850.
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 the dividend allowance of £2,000 the dividend income is taxed as follows:
- If you have any un-used personal allowance (£11,850 for 2018/19) then that element is tax free
- Any dividends in the basic tax band (up to £46,350 for 2018/19) attract a tax charge of 7.5%
- Dividends above the basic tax band (£46,350 for 2018/19) are charged at 32.5%
- Additional rates of tax of 38.1% will apply at the upper tax band (for income over £150,000 for 2018/19)
Tax efficient dividend and salary structure
The theory is as follows:
- You take a low tax efficient salary no higher than the personal allowance so that it does not attract personal tax
- You should make sure the salary is high enough for national insurance purposes i.e. that it counts as a ‘qualifying year’ for your national insurance history to help protect your future entitlement to state pension and other benefits
- The salary is a tax allowable cost for your business, so corporation tax is saved at 19% (for 2018/19) on the gross salary
- Any additional amounts you extract from your company are treated as dividends which do not attract national insurance, therefore you are not paying any more national insurance than you need to be
- Please note that dividends cannot be treated as a tax allowable expense (unlike a salary) so your company does not save corporation tax on the dividends
Many people choose to limit their total income to not go into the higher tax band (£46,350 for 2018/19) so they are not taxed at the higher levels of tax, but this will be a personal choice and a balance will need to be made between tax efficiency and how much of the available profits in your business you want to extract.
The following key assumptions have been made when preparing the calculations below:
- You have no student loan balance
- Your only income is your salary and dividends from your company
- You are not caught by IR35
- You have a standard personal allowance
- Your company has sufficient post tax profits to support these dividends
- You have been a director of the company for the complete tax year
There are two National Insurance thresholds you need to be aware of:
- Lower Earnings Limit– as long as you earn above this you are protecting your entitlement to future state pension and benefits, without necessarily paying any National Insurance
- Primary Threshold– if you earn above this you have to start paying National Insurance so the ideal is to go up to the Primary Threshold but no higher. The National Insurance Primary Threshold for 18/19 is £162 per week or £8,424 for the year. Therefore, we would suggest a monthly Gross Salary of £702 which stays just below this threshold.
With regards to dividends, assuming you wish to take dividends up to the higher tax band but no further:
- Salary is £8,424 so this leaves £3,426 of dividends that can be taken tax free in the personal allowance (£11,850 less £8,424).
- The next £2,000 of dividends are also tax free as they are within the dividend allowance. This leaves the balance of dividends of £32,500 taxed at 7.5% = £2,438 of tax.