By Cheaper Accountant, Apr 5 2017 06:00AM
Even though there are changes to the dividend tax due to come into effect in the not so distant future, the strategy of paying yourself a low salary topped up with dividends from your limited company remains the lowest tax method of extracting income from a limited company. So the strategy to pay yourself remains the same but this blog article will explain how much you can pay yourself without incurring any income tax and national insurance charges.
With a new tax year quickly approaching (6 April 2017 to 5 April 2018) it is timely to update the readers of our blog on how much to pay yourself in salary from your limited company during the 2017-18 tax year.
The good news is that the monthly sum that we recommend you pay yourself has increased to £680 a month (up from £670 a month during 2016-17) which results in an annual director’s salary of £8,160. You should then pay yourself dividends on top of this low level of salary.
At this level of salary you won’t have to pay employer or employee national insurance contributions and no income tax will be due to be paid to HMRC on the wage you receive. The dividends you receive will be subject to dividend tax but the tax-free dividend allowance of £5,000 will apply during 2017-18.
The total director salary of £8,160 is less than the personal allowance for the 2017-18 tax year but don’t be tempted to pay yourself up to the personal allowance as you will then end up paying more tax. If you pay up to the personal allowance you will be liable to pay national insurance contributions that can be avoided at the £8,160 salary level.
The following gives an approximate breakdown of what tax will be due on an overall director income of £45,000.
Gross Salary £8,160
Total Income £45,000
Dividend Tax £2,140
Total Tax £2,140
Income After Tax £42,860
The above strategy results in a take home pay of £42,860 or 95% of total income. The tax you will pay is far less than being paid in full via the PAYE tax system.