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.
In the last article, we discuss how to reach optimal level of salary and dividend (follow this link ) based on the assumption that the total gross income is within the basic rate band.
If your gross income is higher than £45,000, utilising personal allowance by allocating it to a different catalogue of income may save you tax.
Salary is £38,500, dividend is £10,000
Option 1: allocate PA to salary
Salary will be taxed at: £27,000 x 20% = £5,400
Dividend will be taxed at: £5,000 x 0% and £5,000 x 32.5% - £1,625
Total tax bill of option 1 is £7,025
Option 2: allocate part of PA to dividend income:
Salary will be taxed at: £32,000 x 20% = £6,400 (using £6,500 PA)
Dividend will be taxed at: £5000 x 0% (using £5,000 PA)
Total tax bill of option 2 is £6,400
You can save £625 on tax if you allocate the personal allowance to the most favourable way.
(last edited on 1 Jun 2017)
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