The scenarios below are generic and this article is for general information only. To get a more tailored calculation and information about the best combinations for salary and dividends in 2019/20 for your company get in touch with us.
Personal Allowance For 2019 / 2020
The personal allowance for 2019/2020 has increased to £12,500 from 2018/19’s allowance of £11,850. The basic rate threshold has also increased to £50,000 (compared to 2018/19’s £46,350).
The dividend allowance remains at £2,000 before it’s taxed.
Further details regarding dividend, salary, tax free allowance and NI can be found on the HMRC Gov website.
In the 2019/20 tax year, dividend taxation is as follows:
- No tax to be paid up to a £12,500 personal allowance + £2,000 dividend allowance. Please note that you can utilise personal allowance against dividends if you pay yourself less than £12,500 in salary for the year.
- Any dividends up to £50,000 (after taking personal + dividend allowance into consideration) will be taxed at 7.5%.
- Dividends in excess of the basic rate tax band will be taxed at 32.5%
- Any dividends falling within the additional rate band (income above £150,000 for 2019/20) will be taxed at 38.1%.
Salary and dividends combination for a sole director company for 2019 / 2020:
Most single director companies use a strategy of taking a low salary and a higher dividend amount because this is the most tax effective combination for their salary and dividends in 2019/20.
What does this mean?
- Paying a salary of £8,632 (primary threshold) qualifying for the national insurance contributions which go towards your state pension without paying any NI contributions.
- Your company can claim the cost of your salary when it calculates it’s corporation tax. As a result it will save corporation tax at 19% on any salary taken, which is £1,640 (£8,632 * 19%).
- Any further money you take from the company as dividends you pay 7.5% dividend tax on however, no NI is paid on dividends (£35,500 @ 7.5% = £2,663). Remember that dividends are declared after tax so the company doesn’t save corporation tax on dividends as well.
- As a single director / single employee company you cannot claim employment allowance, hence paying salary a of £8,632 and dividends up to £41,368 ( making a total of £50,000) can be the most tax efficient strategy.
Take home pay £47,337 (£50,000 less £2,663).
Salary and dividends combination for a company with more than one director / employee for 2019 / 2020
As a multiple director / employee company you are generally eligible to claim employment allowance, however this approach also won’t be effective if the employment allowance has already been utilised against the NI due on the salaries paid to your company’s other employees.
If you are eligible to claim the employment allowance, your strategy should be:
- To pay salary up to a personal allowance of £12,500. This is a saving company tax of £2,375 @ 19%, however you will have to make employee NI payment of £464. No employer NI payment due to employment allowance.
- Nil tax for dividends for first £2,000 due to the dividend allowance
- Remaining £35,500 (after £12,500 & £2,000) dividends taxable at 7.5% – £2,663.
With this strategy, there will be £3,127 (£2,663 + £464) basic rate tax and Employee’s national insurance to pay.
Take home income: £46,873 (£50,000 less £2,663 and £464).