With each financial year comes a string of dos, don’ts and deliberations. Limited company Directors are always keen to minimise their tax payments, but it’s important to get the lay of the land, so to speak, when strategizing your earning model for the next 12 months.
Have you thought deeply about salary and dividend structures – moreover, how they can fit together for a healthy business plan? If not, let us shine a light on what’ll treat you well in 2017. There’s no merit in losing wedges of your income to HMRC, when the optimal salary and dividend payments for 2017/18 are here for the taking…
Splitting the shape of your earnings
As a limited company Director, you’re already aware (or should be) of the dividend thresholds you’ve been granted. They are designed to ease the tax burden on your shoulders; like regular income, they have their own lines in the sand for an increased tax rate, but you can stay beneath them if you know what they are.
In terms of your personal income allowance (i.e. the money you withdraw as a salary), there’s a tax free figure of £11,500 to accumulate. Providing you don’t exceed it, you won’t have to pay a penny of tax to HMRC.
This is, however, quite a low sum. Hence, dividend payments can ‘top up’ your take-home earnings. They are taxed if you go over £5,000 a year: the amounts are 7.5% for basic rate tax-payers, 32.5% for higher rate, and 38.1% on the additional rate band.
As long as your wage and dividend payments as a lump figure don’t cross over £45,000 (the basic rate level for workers in England, Wales and Northern Ireland), you’ll just be liable for the 7.5% dividend obligation, and fork out nothing for up to £11,500 worth of direct income.
What is the optimal structure?
If your earnings are below £45K a year, that leaves £33,500 of dividends to hand yourself in the 2017/18 tax period. You could split these figures – the £35,500 and the £11,500, considering you’re bringing that much in on the whole – into twelve monthly earning divisions.
However, NI contributions can sting you too if you’re not careful. Dividends have a huge advantage in this regard – National Insurance can’t touch them. Therefore, it’s sensible to keep your legal salary just below £157 a week, the maximum figure before NI comes into play. The rest can be filled out with dividend funds.
In total then, you should be receiving no more than £680 a month in direct earnings, while £3,070 can be paid through dividend’s. This is the optimal strategy for retaining the greatest amount of cash, relative to what you’re bringing into the company. And don’t forget, the first £5,000 of dividends is exempt from tax altogether…
This is merely a sliver of the advice we can give you for 2017 and beyond. Hiring an accountancy team with the skills, resources and experience to boost your earning potential is a sound decision that you’ll never regret. For a succinct, far-seeing salary and dividend model, check out Bright Ideas today on 0161 669 4221 or email info@biaccountancy.com for more details.
