The dividend allowance has been reduced to £2,000 from 6 April 2018, coinciding with the annual shifts in personal allowance and basic rate band. All these changes will have an effect on owner-manager individuals.
PERSONAL ALLOWANCE
The personal allowance for 2018/19 is £11,850 and the basic rate band is £34,500. This means that you need to have an income in excess of £46,350 before you pay tax at higher rate.
NATIONAL INSURANCE
- Director or employee – the primary and secondary Class 1 thresholds increased to £162 per week, which is £8,424 per year. This means that you will not incur any Class 1 NI liability if you are paid below £8,424.
- Self-employed – the abolition of the Class 2 NI has been delayed until 2019/20.
- If you earn profits in excess of £6,205 a year, the Class 2 NI rate for 2018/19 is £2.95 per week.
If you earn profits between £8,424 and £46,350 a year, the Class 4 NI rate is 9% and the higher profits rate is at 2% where these exceed £46,350.
INCORPORATION
If you are a sole trader who wants to incorporate with profits of:
- £25,000 – you will only approximately save £700 in tax and NI
- £50,000 – your tax savings are more significant at approximately £2,000
- £70,000 – your tax savings are at £2,380 but above this, the savings contract
- In excess of £145,000 – this is when it is actually more tax-efficient to be a sole trader
If you are already incorporated, you will need to have the optimal balance between salary and dividends.
- With company profits at £70,000
- Salary of £8,424 – no Class 1 NI is payable
- Retained profits of £61,576 – corporation tax liability of £11,699
- Dividends of £49,876 – personal tax bill will be at £6,321
Out of the £70,000, as a director, you will end up with £51,979.
- With company profits at £70,000
- Salary of £11,850 – employee’s NI of £411, employer’s NI of £473
- Retained profits after director’s salary and employer’s NI as above of £57,677 – corporation tax liability of £10,958
- Dividends of £46,719 – personal tax bill will be at £6,409
Out of the £70,000, as a director, you will end up with £51,749 which is £230 worse off.
TAX TIP
If your spouse is involved in the business, there is a scope for greater savings as you could utilise two personal allowances and basic rate bands and could enhance the company’s exemption from Class 1 NI by utilising employment allowance.
If you have a substantial director’s loan account credit balance, you could charge the company a commercial rate of interest on the amount owed to you and use this to replace dividends. You can then utilise the personal savings allowance and savings starting rate to potentially extract up to £6,000 tax-free.