As in previous years we’ll set out the most common optimum, then end with a few exceptions. There are negligible significant changes between 2018/19 and 2019/20, mainly just inflationary increases to most thresholds. Just to clarify the below are suggestions for the tax year starting from 6 April 2019.
The “most common” situation:
For one person companies in 2019/20, we recommend a salary of £719/month. This replaces £702/month for 2018/19. It’s the maximum before NICs actually become payable, yet is still sufficient to count as a contributing year towards basic state pension.
On the basis of that salary (so £8,628 for the year) and no other personal income, you can take dividends of:
– £5,872 and suffer no personal tax (0%)
– £41,372 (ie an extra £35,500) and suffer £2,662.50 personal tax (£35,500 at 7.5%)
– £91,372 (ie an extra £50,000) and suffer £18,912.50 personal tax (the above £2,662.50, plus £50,000 at 32.5%)
The above thresholds are not hard limits, just the levels above which the marginal rate of tax increases (ie the amount of tax suffered on each extra £ of dividend taken). Above the top limit you start to lose your personal allowance so the effective tax rate becomes increasingly penal.
– 2+ staff – for those with 2+ people on the payroll but overall very modest salaries (so £3k employment allowance won’t be fully utilised) and preferring tax savings over simplicity, you may choose to opt for the slightly higher salary of £1,041/month (equivalent of £987/month for 2018/19). This will incur employee NICs, but still no PAYE as under the personal allowance, and the employment allowance will negate the employer NICs. In practice this will save a couple of hundred quid over the year, but be aware staff net pay won’t consistently equal their gross pay, so there will be deductions to pay over to HMRC. Please also note this extra £3,864 salary over the year impacts on the dividend thresholds, so basically £2k tax free, £35.5k basic rate (£37.5k total dividends), £50,000 higher rate (£87,500 total dividends). If in doubt, just go for the lower £719/month, it costs negligibly more and avoids complications.
– Student loans/higher income child benefit charge – these aren’t really exceptions as such, but things to be aware of that can increase what you have to pay. If you have an outstanding student loan or claim child benefit, and your total overall income is above £21,000 or £50,000 respectively, then there will be additional charges of loan repayments and/or having child benefit clawed back.
If you don’t want to be overly concerned with the precise details, then the general logic isn’t surprising. In the vast majority of situations, as personal income goes up, the tax rate goes up.
Also, don’t be concerned about possibly dribbling just above a threshold. If for example you went £10 into the higher rate band, it just means that top £10 of your income would suffer 32.5% instead of 7.5%. There’s no sudden sting for going pennies above a threshold.