Your profit extraction Strategy from April 2020
While it feels like normality has deserted us, it is that time when I give my regular update on your annual profit extraction strategy. Once again please do bear in mind that this Salary and Dividend blog gives our recommendations for taking a salary and dividends from your limited company. The figures are generic and may not be suitable for your circumstances e.g. if you have more than one director being paid a salary in your company. We strongly recommend that you take specific advice for your own personal circumstances. This blog is for illustration purposes only and should not be relied upon for your tax planning or tax affairs.
How much salary should you pay?
As always we keep things simple. Not much has changed this year. The dreaded dividend tax remains in effect with the Dividend Allowance at just £2,000 per person.
So from April 2020 (and not before) you can pay a salary of £732 / month without paying any tax or NI.
If you choose this option you:
- You do get National Insurance Credits towards some benefits for example state pension
- You must be registered as an employer
- You have to file an RTI (real time information) return each pay period – RTI fines will apply for late filing
- No income tax or national insurance is due on a salary at this level
- This is a perfectly legal and an acceptable way of paying yourself from your company; in fact HMRC have been known to state that they do not have a problem with this approach
Dividends – from April 2020
Any dividends paid over £2,000 will attract dividend tax.
The rates of tax will be:
- First £2,000 of dividends – tax free
- 7.5 % for dividends falling within basic rate tax (caution on how this is calculated)
- 32.5% for dividends falling within higher rate tax (which will be over £50,000 from April 2020)
- 38.1% for dividends falling within the additional rate of tax with income over £100,000 meaning restrictions on your personal allowance
How to work out your dividend tax
The calculations assume that you have no other income.
You would pay a salary of £732 x 12 from the company = £8,784
You can then pay £2,000 plus the remainder of your personal allowance as dividends without any tax = £2,000 + (£12,500 personal allowance less the salary of £8,784) = £5,716.
So a total of £14,500 will be tax free (dividend allowance + personal allowance).
You will pay tax after £14,500!
Tax at 7.5%
For the next £35,500 of income you will pay tax at 7.5%.
So you can take:-
- a salary of £8,784
- dividends of £5,716 + £35,500 = £41,216
- Total income of £50,000
- Dividend tax due on this will be (£35,500 x 7.5%) £2,662.50
Tax at 32.5%
Dividend income over £41,216 will attract tax at 32.5%.
If your income exceeds £100,000 you should obtain a personalised illustration as your personal allowance is restricted at that level.
Dividend tax rule of thumb
The dividend tax rule of thumb to use is:
- take a salary of £8,784
- tax free dividends of £5,716 to use up the remainder of your personal allowance
- £75 of tax per £1,000 of dividends from £5,716 up to total dividends of £41,216
- £325 of tax per £1,000 of dividends over £41,216
- If your income exceeds £100,000 obtain a personalised quotation as it gets really complicated!
Payments on Account and the new Dividend Tax
As last year the new dividend tax puts most people into payments on accounts. There is nothing new to report on this.
Dividends are paid out of post tax profits.
Everyone has different tax affairs; this factsheet is for illustration purposes only and should not be relied upon for your tax planning or tax affairs. We recommend that you seek the advice of a suitably qualified accountant before making any tax planning decisions. Please do check accountancy qualifications; anyone can call themselves an accountant.
Get your calculation checked with your accountant to make sure you have a tax plan that suits you.
Failure to process your payroll and submit the correct RTI (Real Time Information) returns could result in fine or penalties.
Disguised employment issues aside, operating as a limited company is perfectly legitimate and is purely a business choice.
Salary is an allowable business cost and will reduce the profit subject to corporation tax.
The above figures are based on the tax rates for England. Rates and allowances for Scotland and Wales may be different – please consult your accountant for more information.