Optimal dividend strategy for 2017/18


Salary or dividend?

Same old question, should I take a small salary and get paid by dividend? There were changes of tax on dividends after April 2016, however, the answer for 2017/18 is still yes. There are several scenarios.


Please refer to our early articles about Rates and Thresholds for 2017/18.

Example:


Assumptions:
  • Paying yourself a salary up to the NIC primary threshold (PT) (weekly: £157; yearly: £8164) will ensure you receive the state pension when you retire, it will also save you tax.
  • Your company has other employees except you. Otherwise, you can’t claim employment allowance.
  • Your gross income stays in the basic band.

  • Detailed calculations:
    2017/18 option 1 option 2
    salary £11,500 £8,164
    dividends £33,500 £36,836
    Total gross income £45,000 £45,000
    unused PA £3,336
    Employee NIC -£400
    Employer NIC -£461 *
    Tax on dividends -£2,138 -£2,138
    Total take home income £42,001 £42,862
    Total take home income (if claiming Employment Allowance) £42,462 £42,862


    Conclusion:

    You are better off paying a salary of £8164 and dividend of £36,836 as shown in Option 2. If you are an owner-manager or a contractor, who does not have access to the Employment Allowance, you can save more.


    Other considerations:
  • You can’t take dividends if your company is in loss, but you can take a higher salary.
  • Salaries is tax deductible for corporation tax, however, dividends are not pre-tax.
  • Dividend allowance is available to all individuals, therefore, you may save tax if you transfer shareholding to your spouse to utilise the £5,000 allowance.

  • Contact us now to discuss your specific situation.

    How much to take?


    The example above is based on assumptions listed above. There are other things to consider when you make your financial decisions, such as

  • higher tax band: £33,500 will be taxed at 40%
  • upper tax band: £150,000 will be taxed at 45%
  • tax tipping point for child benefit charge: £50,000
  • tax tipping point for tax free allowance withdrawal: £100,000


  • How to utilise Personal Allowance?

    After changes in dividend tax, free allocation of personal allowance can save you tax. Your tax calculator will not tell you that, because the automatic system offsets allowances and reliefs in order. Contact us now to discuss your specific situation.


    Our next article will give examples to show you the way most favourable to the taxpayers.



    (last edited on 25 May 2017)



    Disclaimer:

    The above information and calculations are for illustrative purposes only. No liability is accepted by O’Brien S & Co Ltd for any actions or losses from investment in reliance on the information and calculations. Consult a qualified professional financial advisor before making any financial decisions. O’Brien S & Co Ltd holds the copyrights in all materials on the website. All rights reserved.




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