The current tax year is from 6 April 2018 to 5 April 2019 – ensure you know the changes to directors salary and dividends.

For the 2018/19 tax year the personal allowance is £11,850.

If your only income through PAYE was your company director salary, then any additional salary above £11,850 would be taxed at 20%, and once you hit the higher tax band of £46,351 (including the personal allowance), any additional salary would be taxed at 40%. Check out the tax bands on HMRC website.

With regards to dividend income, from 6th April changes have been made, and a new dividend allowance has been implemented.

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 this £2,000 the dividend income is taxed as follows:

• If you have any un-used personal allowance then that element is tax free
• Any dividends up to £46,350 for 17-18 attract a tax charge of 7.5%
• Dividends above £46,350 are charged at 32.5%
• Additional rates of tax will apply and personal allowance will be reduced if you declare more than £100,000 in the tax year

Let’s look at a couple of scenarios below:

1. If your only source of income is dividend, you could receive £13,850 of tax free dividend income in the 18-19 tax year. This is made up of your £11,850 personal allowance and the £2,000 dividend allowance. Any dividend withdrawn from £13,850 to £46,350 will be taxed at 7.5% and any dividend from £46,350 to £100,000 will be taxed at 32.5% without losing your personal allowance (please see chart below for illustration purposes).
2. You pay yourself the lowest possible salary to avoid national insurance but enough to be entitled to state pension (£702 per month, £8,424 per year) tax free. Then pay yourself a dividend of £5,426 tax free. This takes advantage of the £11,850 personal allowance and the £2,000 tax free dividend income. By putting through £8,424 as salary, you also receive a 19% corporation tax deduction for the expense through your Company. Any dividend withdrawn from £13,850 to £46,350 will be taxed at 7.5% and any dividend from £46,350 to £100,000 will be taxed at 32.5% without losing your personal allowance (please see chart below for illustration purposes).

If your salary is above £100,000 we have some clever ways to help you reduce your tax liability! Contact us for further information.

*these figures assume there are no additional sources of income.

If you are a GrowFactor customer with any questions regarding this, please get in touch with your dedicated associate or contact hello@growfactor.com.  If you are not a customer of GrowFactor but would like additional information or if you looking for a Xero Accountant in London or a QuickBooks Accountant in Birmingham, please get in touch for a free consultation.

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