Key tax dates and deadlines for 2018/19
It is an inevitable reality that, for anyone earning a livin...
By Jonathan London on 25th September 2015
For many freelancers and contractors, maximising take home pay is one of the considerations when deciding to operate through a limited company. This can be achieved by taking a lower wage and topping it up with dividends. As dividends are exempt from National Insurance contributions, they can be a more tax efficient way of getting paid.
However, dependent on your circumstances, you still have to pay some tax on dividend payments, and from April 2016 the way Dividend tax is calculated will be changing. We outline below what you need to know about the new dividends system and how it will affect the money you bring home.
Typically, as a company director you can keep your salary below your Income Tax Personal Allowance (thereby avoiding Income Tax payments) and take the rest of your ‘pay’ from your company’s profits.
Dividends are taken out of your profits after Corporation Tax has been deducted. At the moment, income tax is due on the gross dividend amount after a notional dividend tax credit of ten per cent is applied. The amount of dividend tax you pay is tiered (similar to regular PAYE income):
However, from April 2016 the Dividend Tax Credit will be replaced by a zero rate tax band (tax-free Dividend Allowance).
Starting from April 2016, there will be new tax rates as well as a new tax-free ‘allowance’ of £5,000 on top of your existing £11,000 personal allowance. Unfortunately, for many limited companies this means a tax increase.
Whilst you don’t pay tax on the first £5,000 of your dividend income, you do have to pay dividend tax depending on the income tax bracket you fall into:
When calculating your dividend vs salary options, there are other factors to take into account too:
If you draw a salary of £8,060, you can take £34,940 in dividends, which will take you up to the £43,000 higher rate tax threshold (£11,000 personal allowance plus £32,000 basic rate band). After deducting the £5,000 tax-free dividend ‘allowance’, your taxable dividends are reduced to £29,940. As you still have £2,940 remaining of your personal allowance (£11,000 – £8,060), you’ll only pay dividend tax on the remaining £27,000 (£29,940-£2,940) at 7.5%, which is £2,025.
For a detailed analysis of how your finances will be affected by this change, we recommend talking to an accountant to give you a personalised breakdown. They’ll also be able to help you balance the ratio of salary and dividends in order to maximise your earnings based on your existing set up and income you require.
Take a look at our recent blogs below.
GDPR – the General Data Protection Regulation, comes into effect on 25th May and is the bigges...
Published: 24th May 2018
As a business owner, your time is way too precious to spend hours dealing with HMRC or Companies Hou...
Published: 14th May 2018
“Never do tomorrow what you can do today. Procrastination is the thief of time” Charles Dicken...
Published: 11th May 2018
Congratulations! The very fact you clicked this far shows you are considering employing staff, and t...
Published: 17th April 2018
It is out with the old and in with the new when it comes to tax relief on childcare costs from April...
Published: 9th April 2018
The Boox accounting app has always been at the forefront of helping our clients understand their com...
Published: 26th March 2018
Spring has officially sprung and the start of the 2018/19 tax year is just around the corner –...
Published: 23rd March 2018
If your business is employing staff, you should already have a workplace pension in place, under the...
Published: 23rd March 2018
At this time of the year we are used to seeing the Chancellor holding aloft the red box ahead of the...
Published: 15th March 2018
A dispute has erupted between the BBC and 170 of its presenters over their tax arrangements and thei...
Published: 12th March 2018
The rush for taxpayers to file their 2016-17 self-assessment tax return is over for another year, an...
Published: 27th February 2018
If you need a little help to find the right accountancy service, don’t worry.
Get in touch with our friendly team for a FREE service consultation.
Thousands of contractors, freelancers and locums turn to Boox for help and advice with their limited company accounting. They love our personal service and app.
Specialist accounting for sole traders and the self employed, Boox combines easy online tools with expert support to take away the stress of handling your accounts.
Our combination of market-leading accounting software and expert personal advice gives you greater financial control and more time to grow your business.