If you run a limited company it is likely that you will receive personal income from your company in the form of both salary and dividends. As dividend tax rates differ from other forms of income, and the tax due is usually worked out after the tax year in which the income was received, it is wise to invest some time in personal tax planning.
The benefit of planning your personal tax is that you will be able to utilise your tax allowances and budget for getting it paid. By planning the timing of paying dividends you pay yourself you can fully maximise the lower rates of tax that may be available.
As there are a number of things to consider, including how much other income you may have received, if you have any benefits or if you have made personal pension contributions, it would be sensible to seek the advice of an accountant or tax professional to review your personal tax position.
2018/19 Dividend tax rates and allowances
In the current tax year, every taxpayer can receive £2,000 of dividends without incurring a personal tax liability – good tax planning ensures that this allowance is utilised to maximise the amount that is taken from the company free-of-tax. This is in addition to your personal allowance.
After the dividend allowance, the rate at which dividends are taxed is dependent on the level of income received – for tax purposes, dividends form the top portion of your income and therefore all other income sources should be considered first before assessing the rate of tax that will be paid.
Dividends are then taxed at 7.5% in the basic rate (total up to £46,350), 32.5% in the higher rate (total income between £46,350 and £150,000) and 38.1% in the additional rate (total income in excess of £150,000). Note that if your personal income exceeds £100,000 then HMRC will reduce your personal allowance by £1 for every £2 of income, until completely withdrawn at an income of £123,700.
Tax Planning
With the end of the tax year approaching (5th April 2019 for the 2018 – 19 tax year) it is important that you carefully plan your dividends and salary to ensure that this year’s allowances are used. Unused allowances will not carry over to the next tax year. Not using your allowances correctly could result in the tax due being at the higher rate (32.5%) rather than the basic rate (7.5%).
For more information about tax planning contact North Devon Accounts.