Personal Tax Planning when operating through a limited company
For contractors that operate through a Limited company, it is likely to be the case 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 that the income is received, it is wise to invest some time in personal tax planning.
The benefit of having a personal tax plan is that you will know where you stand with your personal taxes before your self-assessment has been prepared, to potentially prevent any nasty surprises. Additionally, proper personal tax planning can also ensure that you can utilise any tax free allowances and lower tax rates that may be available, when looking at the timing of paying a dividend to yourself, as a shareholder of the company.
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, irrespective of income level, 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, some (but not necessarily all) of which is likely to have been used against your salary and/or other income.
Outside 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income exceeds £100,000 then HMRC will reduce your personal allowance by £1 for every £2 of income, until completely withdrawn at an income of £123,700.
As highlighted earlier, there are a number of things to consider when working out the tax that may be due on dividends. With the tax year end approaching (5th April 2019 for the 2018/19 tax year) it can valuable time invested when considering looking at the timing of when dividends are paid. For example, if you have un-utilised basic rate allowances remaining in the current tax year that are not used, these will not carry over to the next tax year. As such, the timing of the dividend payment can be really important, as it could result in the tax due being at the higher rate (32.5%) rather than the basic rate (7.5%).
Here at Gorilla Accounting, we can review your personal tax position and provide feedback on the likely tax due and how you can best utilise any personal tax allowances in the tax year. The is a service we provide in addition to the limited company service and is all included in the set monthly fee of £89 + VAT per month.