Salary dividends 2017/18 in one-person companies (up to £100,000 in income)
Tax is complicated. And it’s Panthera’s job to devise the most efficient tax structuring plans for all of our customers.
Ultimately, you pay Panthera to reduce the tax you and your company have to pay to its absolute minimal level while respecting the spirit and letter of the law.
The question we’re most asked by directors is “how should I split my pay between salary and dividends?” This all depends upon you, your personal circumstances, and how your company is set up.
There’s no one answer that fits everyone. So, over the course of the coming weeks, we’re going to be answering that question to fit a variety of different situations – situations that you, our customers, present us with.
For the first of this series, we’re going to look at a company director over the age of 21 where there are no other employees in the business and where the director’s only income comes from his or her firm and their income is not higher than £100,000 in the tax year. If you have income from a variety of sources, we’ll cover that in another article very soon.
Salary dividends 2017/18 – salary
Salary comprises of three different things – income tax, National Insurance Employees’ Contribution and National Insurance Employers’ Contributions.
These are the current rates of income tax –
| Band | Taxable Income | Tax Rate |
|---|---|---|
| Personal Allowance | Up to £11,500 | 0% |
| Basic Rate | £11,501 to £45,000 | 20% |
| Higher Rate | £45,001 to £150,000 | 40% |
| Additional Rate | Over £150,000 | 45% |
Your first £11,500 of personal income attracts no income tax. Once you pass £100,000 in income during a year, this changes but we’ll cover that soon in another article.
You will pay Class 1 employee’s National Insurance rates – that’s 12% of your salary between £157 and £866 per week. If you’re over £866, you pay 2% on the part of your salary that’s over.
Both income tax and Class 1 employee’s National Insurance are the money that you personally pay to the government (although this is collected by your company and paid to HRMC via the RTI PAYE system).
National Insurance Employer’s Contribution is a payment of 13.8% of your wages above £157 a week. Your company pays this through the RTI PAYE system also.
So, how much can you earn without paying any form of income tax or National Insurance? The answer is £8,164.
Salary dividends 2017/18 – dividend taxes
A shareholder in a limited company is allowed to pay themselves dividends from the profit their company makes. Unlike salary, dividends are not an allowable deduction from any corporation tax payment you make.
The first £5,000 you pay yourself in dividends are free of tax.
How your taxed on your dividends depends on the total taxable income you take home during the year and which tax band you fall into:| Band | Tax rate on dividends over £5,000 |
|---|---|
| Basic Rate | 7.5% |
| Higher Rate | 32.5% |
| Additional Rate | 38.1% |
Salary dividends 2017/18 – finding the balance
How you split your payments between salaries and dividends makes a big difference. Let’s take a look at how the amount of tax someone earning £50,000 a year can vary depending on how their pay is structured.
| Salary & Dividends | Salary Only | Dividends Only | |
|---|---|---|---|
| Total Pay | £50,000 | £50,000 | £50,000 |
| PAYE | £8,164 | £50,000 | £0 |
| Income Tax | £0 | £8,696 | £0 |
| NI Employee | £0 | £4,524 | £0 |
| NI Employer | £0 | £5,773 | £0 |
| Dividend Paid | £41,836 | £0 | £50,000 |
| Dividend Tax | £3,763 | £0 | £3,763 |
| Total Personal Tax | £3,763 | £18,993 | £3,673 |
| % of salary | 7.53% | 37.99% | 7.53% |
| Total Cost | £50,000 | £55,774 | £50,000 |
Paying £50,000 in salary only means that you would pay £18,993 in tax (an effective rate of 37.99% of gross earnings) and your company would pay £5,773 in National Insurance Employers’ Contributions. The total cost of doing it this way is £55,773.
Paying yourself £8,164 in salary attracts no form of tax or National Insurance. Topping up with £41,836 worth of dividends produces a dividend tax bill of £3,763. That’s over £15,000 less in personal taxation you’ll be paying and your company also does not have to pay National Insurance Employers’ Contributions (although your corporation tax will increase because dividends are not an allowable deduction unlike salary).
If you pay yourself in dividends only, you’re left with the same take-home pay and zero contributions in National Insurance Employers’ Contributions (but a slightly higher Corporation Tax bill than the salary/dividend split described in the last paragraph). However, not paying a salary means that you won’t build up your entitlement to certain state benefits should you need them in the future.
Salary dividends 2017/18 – don’t get caught out paying yourself unlawful dividends
Always make sure there is retained profit in your business before you pay yourself a dividend. If there is no retained profit in your company, don’t pay yourself a dividend. You cannot pay yourself dividends on the expectation of future profits within a given year.
Panthera tip – you’d be surprised just how many companies get caught out this way. If you’re not sure if your business is profitable and you need to pay yourself from cash in your company, please talk to us first. If you’re keeping Xero up to date, we’ll be able to get an answer for you in no time at all.
Salary dividends 2017/18 – always seek our guidance
This is a complicated area of taxation and you need the advice of your accountants here at Panthera. Please call the team on 01235 768 561 or email enquiries@pantheraaccounting.co.uk.
Coming up in the next few weeks, salary and dividend split considerations for directors in different situations.