Written by Director, Huw Moseley:
“How much salary or dividend should I take?” is one of the questions I get asked most by Sole Directors. And since the new tax year, my answer has changed. As of last month – your personal allowance for the tax year 2018/2019 will be £11,850 (an increase of £350). However, the tax-free dividend allowance has been slashed to just £2,000 (down from £5,000).
This means that any dividends you pay yourself over £2,000 will be taxed at 7.5% within the basic rate (up to £46,350) and then at the higher rate of £32.5%.
Most sole directors of limited companies take enough salary to earn their National Insurance ‘stamp’ and all additional funds as dividends. How much salary depends on whether you can or cannot claim employment allowance:
- If you CAN claim allowance (you have more than 1 person on the payroll) – in this case the optimum level of salary to take is £11,850 per annum (£987.50 per month).
- If you CANNOT claim allowance (you have no employees) – then the optimum salary level for you will be £8,400 per annum (£700 per month).
(NB – these figures assume that your only income is from your Limited Company.)
But here are some other tax planning options you may want to consider:
- Transferring a minority shareholding to your spouse, so they can also make use of their annual £2,000 dividend allowance, and/or
- Increasing pension contributions (an allowable tax deduction), and/or
- Claiming a ‘use of home’ allowance by setting up a simple rental agreement (this is an option for Limited companies as well).
Here at Link Accounting we don’t believe that ‘one size fits all’ and work together with you to understand your business in depth and develop a strategic tax plan to suit your specific circumstances. We’ll provide forward-thinking advice on how to improve your situation and ensure you haven’t paid too much tax, whether for your business or your personal tax.
So if you’d like a chat about how we can help – why not drop me a line directly: Huw @ link-accounting dot co dot uk.