For those who are directors and shareholders of their own companies it’s time to make sure you are paying yourselves in the best, most tax efficient way.
The following guidance will outline this for you however individual circumstance will need to be taken into account, but a lot of people will fall into the default setup which is what this article will explain. The default setup is that you have no other personal income, if this is not the case for you, please reach out to us for specific advice for you.
You should also note that dividends can only be paid when a business has sufficient reserves. That is that it has accumulated a profit over its history (even if that’s just the last month). You should always have enough money within the company to pay the tax currently due. Failure to do so may mean the dividends are not legal.
Below is the optimum rates from a tax point of view.
**Please note if you are a sole director business with no staff there will be an additional admin task of having to pay HMRC PAYE every month with the below proposed salary, this can be avoided, and the overall tax position does not change by much. If this is something you would like to discuss, please reach out to us**
Setup to pay no personal tax
If your desired outcome is to incur no personal tax the table below shows the set up for this. Please note this is not necessarily the most tax-efficient way if you have spare profits in your company
Setup to only pay basic rate tax(most common)
This is the most common setup for those that are directors and shareholders with no other personal income. This only exposes you to basic rate dividend tax of 8.75%.
Setup to have total income of £100k
If £50k isn’t quite enough to live the lifestyle you would like to live or leaves excess profits and cash in the business then you may wish to consider taking up to £100k. This does however expose any income you earn over £50k to tax at 33.75%
Above £100k
It’s not normally recommended to go over £100k total earnings unless you really need to. This is mainly as you lose some or potentially all of your tax free personal allowance meaning the effective tax rate from £100k - £125k is actually around 55%. This isn’t to say it’s not possible you just need to ensure that the correct tax planning is done so you are fully aware of the consequences of doing so, so please reach out if this is the case.
If you need further help or guidance around efficient tax planning, then all our packages include this as standard.
Simply book a discovery call to arrange a call back to discuss further.
