The most common reason for having a limited company is the tax savings. These can be many thousands of pounds but get it wrong and it can cost you thousands too.
This guide is to make sure you don’t end up the one losing money.
Although individual circumstances need to be taken account of in all circumstances there are a number people who will fall into the default setup. This is what we are looking at in this article. We presume you have no other personal income and that you are running a company where you are the only director and shareholder. If this is not you then you need to seek advice specific to your circumstances to ensure the most efficient setup. Please note this advice is for the 2019/20 tax year (i.e. from 6 April 2019 – 5 April 2020).
You should also note that dividends can only be paid when a business has sufficient reserves. That is that it has accumulated a profit over its history (even if thats just the last month). You should always have enough money within the company to pay the tax currently due. Failure to do so may mean the dividends are not legal.
Setup to pay no personal tax
For some people paying a minimum salary and dividend combo that incurs no personal tax at all is a desired outcome. It is not necessarily the most tax efficient method especially if you still have spare profits. The table below gives the setup for this.
Income Type Basic salary Dividends using remaining personal allowance Tax free dividends Total without incurring personal tax Annual Amount £8,632 £3,868 £2,000 £14,500 Monthly Equivalent £719 £322 £167 £1,208
Setup to only pay basic rate tax
This is the most common setup for director/owners. It is a combination of salary and dividends that only exposes you to a maximum tax rate of 7.5%. You still have the option of additional dividends (profits permitting) but these will be exposed to the higher rate of tax of 32.5%.
Income TypeBasic salaryDividends using remaining personal allowanceTax free dividendsBasic rate dividends Total pay with only incurring basic rate taxTax liability created (payable annually)Annual Amount £8,632 £3,868 £2,000 £35,500 £50,000 £2,663 Monthly Equivalent £719 £322 £167 £2,958 £4,166 £222
Above this level
If you have profits beyond this level then paying dividends is not normally advised as a tax saving measure. If the income is needed or desired and it is accepted that 32.5% of income will be lost as tax then, it is not wrong to pay dividends its just not necessarily a tax efficient method. If it is not needed or desired then this may not be the best method of withdrawing funds from your company. You should consider other withdrawal routes and tax savings measures that may be open to you such as pension contributions. As the tax at stake at these levels is quite high you should seek professional advice before committing to anything.
If you need further help or guidance around efficient tax planning then all of our packages include this as standard. Simply book a discovery call to arrange a call back to discuss further.