cheap accountants - cash

We introduced the readers of our blog to the new dividend tax earlier this year and we’ve decided to expand on that introduction and to clarify what is an effective salary and dividend strategy during the 2016/17 tax year given the changes brought about by the new dividend tax regime.

This new tax has increased the tax take for the vast majority of people who operate via a limited company. However, the tactic of paying a low salary and then paying dividends on top of the salary still remains a low tax option and in fact the option that we often recommend to clients.

For a single director limited company the best option for keeping your tax take as low as possible is to pay a monthly salary of £670 and then to pay yourself dividends from the company on top of this. At this level of salary you won’t have to pay employer or employee National Insurance contributions and no income tax will be levied on the salary payments. The dividends you receive will be subject to the new dividend tax and there is no dividend tax credit to consider (removed from 6 April 2016).

Paying a monthly salary of £670 equates to an annual sum of £8,040 per annum. This is less than the current personal allowance but don’t be tempted to pay a salary up to your personal allowance as you will end up paying more in tax.

The following figures give a breakdown of what tax will be due on an overall income of £43,000.

Salary (£670 x 12) £8,040

Dividends £34,960

Total Income £43,000

NIC £0

Dividend tax £2,025

Total Tax £2,025

Net Income £40,975

You can see from above that the new dividend tax has resulted in tax increase of £2,025 but this is still a lot lower than receiving a salary via PAYE in full time employment.