Best combination for salary and dividends in 2019/20
Ahead of the new tax year, in this blog we discuss the best combination for salary and dividends in the 2019/20 tax year.
Salary and dividends in 2019/20: What are your options?
As a limited company owner, I'm sure you're aware that the best way of taking money from your company is a combination of salary and dividends. So with the new tax bands having been announced, what combination of salary and dividends in 2019/20 will be most tax effective for you?
Please note that this blog assumes you are not a Scottish tax payer because Scotland has different rates of income tax for non-savings income (eg salary).
Salary and dividends in 2019/20: New tax rates
The personal allowance for 2019/20 has increased to £12,500 (2018/19 £11,850). The basic rate threshold has increased to £50,000 (2018/19 £46,350).
The dividend allowance remains at £2,000.
You can find details about all the 2019/20 tax rates on HMRC's website.
In the 2019/20 tax year, any dividend in excess of the £2,000 allowance will be taxed as follows:
Salary and dividends in 2019/20: Low salary, high dividends
Most owner managed businesses take a low salary and a higher dividend because this is the most tax effective combination for salary and dividends in 2019/20. The strategy works as follows:
Shareholders in owner managed businesses normally choose one of two strategies - taking a salary at the minimum level to trigger a national insurance record for your state pension or taking a salary at the personal allowance level.
If you run your business with you're spouse and you're both taking a salary, you may want to adopt the second strategy because you can claim the employment allowance.
Salary and dividends in 2019/20: Strategy 1
Salary at the NI primary threshold
If you can't claim the employment allowance or you aren't good at administration, then this may be the strategy you prefer to take.
National Insurance limits:
We recommend you pay yourself a salary at the primary threshold ie £8,632.
You could then draw dividends up to £41,368 without having to pay any higher rate tax (basic rate band of £50,000 less salary of £8,632).
At this level of dividends you will have basic rate tax to pay of £2,663 calculated as follows:
You will have £47,337 (£50,000 less £2,663) in your pocket after tax.
The company will also save corporation tax of £1,640 (£8,632 * 19%) with this strategy.
Salary and dividends in 2019/20: Strategy 2
Paying salary to utilise the employment allowance
This option won't be available if you're the company's sole director and the only person on the payroll.
This approach also won't be effective if the employment allowance has already been utilised against the NI due on the salaries paid to your company's other employees.
However if you do have surplus employment allowance available we recommend you pay yourself a salary up to the personal allowance of £12,500.
You could then draw dividends up to £37,500 without having to pay any higher rate tax (basic rate band of £50,000 less salary of £12,500).
With this strategy, there will be £3158 basic rate tax and Employee's national insurance to pay. You can see how this is calculated below:
You will have £46,873 (£50,000 less £2,663 and £464) in your pocket after tax.
The company will also save corporation tax of £2,375 (£12,500 * 19%) with this strategy.
Best combination for salary and dividends in 2019/20: conclusion
Whilst the first strategy results in more money in your pocket personally, there is a greater corporation tax saving in the second strategy.
So if you take into account the corporation tax saving when taking a higher salary, you would be better off by £271 if you choose the second option.
For more useful information, check out our Ebooks here.
And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].