The Use and Benefits of a Salary and Dividend Tax Calculator

A Salary and Dividend Tax Calculator is a specialist financial tool to help contractors, freelancers and self-employed people operating through a limited company get easy and quick insight into their tax liability and take home pay. Essentially, they can help you to determine how best to structure your remuneration.

When you operate through a limited company, assuming you operate outside of IR35 you can extract funds from your business through a combination of salary and dividends, and a Salary and Dividend Tax Calculator is a useful tool to get insight quickly and easily into how you can structure this in the most tax-efficient manner.

Simply enter your gross salary and the annual dividend income you will receive, and our Salary and Dividend Tax Calculator will calculate your:

  • Total Income
  • Total Taxable Income
  • Tax On Your Salary
  • Employees National Insurance Contributions (NIC)
  • Extra Tax To Pay On Dividends
  • Total Tax and NIC
  • Take Home Pay
  • Employers NIC

Tax regulations are complex and ever-changing, but using a Salary and Dividend Tax Calculator simplifies things and enables limited company contractors to get an idea of what their tax liability will be based on their chosen renumeration strategy.

But the benefits of using a Salary and Dividend Tax Calculator go beyond just determining how to pay yourself. There are advantages in terms of financial management, making informed decisions about your business finances, and tax compliance. Read on to explore the benefits in depth.

Improve Your Tax-Efficiency

Operating in the most tax-efficient manner is a key objective for limited companies and a significant contributing factor for long-term success. A Salary and Dividend Tax Calculator enables you to easily assess and analyse different income distribution strategies to strike the right balance between salary and dividends to minimise your overall tax liability while remaining compliant.

One of the main benefits, therefore, is tax savings. By using a Salary and Dividend Tax Calculator to optimise your remuneration, limited company owners can significantly reduce their tax burden. This is achieved by leveraging the lower dividend tax rates compared to income tax rates on salary, as well as having a salary at a tax-efficient level.

For the 2023/24 tax year, assuming you operate outside IR35 the most tax-efficient salary is the personal allowance which sits at the NIC threshold of £12,570. This means that income tax and NIC’s are at the most tax-efficient level as they are not taxed, and the salary is a deductible expense from a corporation tax perspective.

Your income can then be supplemented through dividends, which are company profits distributed to shareholders after corporation tax. Dividends are a flexible way to pay yourself as the amount you receive can be adjusted depending on your financial needs at the time.

The first £1,000 of dividends you receive are tax-free, this is known as the dividend allowance. The amount you are then taxed on dividends depends on the level of your other income as dividends form the top portion of your taxable income, however, dividend tax rates are lower than income tax rates on salary.

Basic Rate

If your total income is between £12,571 – £50,270 any dividends you receive will be taxed at 8.75% compared with 20% on salary

Higher Rate

If your total income is between £50,271 – £125,140 any dividends you receive will be taxed at 33.75% compared with 40% on salary

Additional Rate

If your total income is over £125,141 any dividends you receive will be taxed at 39.35% compared with 45% on salary. You don’t, however, receive a personal allowance as an Additional Rate taxpayer.

Using a Salary and Dividend Tax Calculator to minimise tax liability can reduce costs for limited companies which means more retained earnings that can be used to reinvest in the business and scale up operations.

Effective Financial Planning

The uses of a Salary and Dividend Tax Calculator go beyond just tax optimisation. Another key benefit is to help with income planning. You can enter different salary and dividend scenarios into a calculator to easily assess the impact on your take-home pay and tax liability.

This enables you to make well-informed financial decisions based on an accurate projection of net income which provides insight and flexibility in terms of financial planning over the longer term. By providing an accurate projection of income over time, Salary and Dividend Tax Calculators can help limited company owners to tailor their income strategy to meet the financial goals of their business, which should be aligned to a business plan.

They can also help to plan for and achieve other financial goals such as boosting a pension to prepare for retirement, or funding training and education to increase your skill set and the services you can offer to diversify into new areas of work.

A Salary and Dividend Tax Calculator can also help increase the economic resilience of limited companies, contributing to long-term financial security. By optimising tax-efficiency to maximise retained earnings, while also helping to build a robust financial plan, you can better position your business to cope with lean periods or seasonal fluctuations. This is especially the case for limited company contractors and freelancers who can experience income variance due to the nature of project-based work.

Tax rates and allowances are subject to regular change which can impact your overall take home pay. By utilising a Salary and Dividend Tax Calculator, you can stay well informed of the expected amount of tax and National Insurance you are likely to pay at the end of the tax year. You can then use this as a basis for reviewing your renumeration strategy and making any adjustments depending on your circumstances and overall income requirements.

A Salary and Dividend Tax Calculator is therefore a useful and important tool for self-employed people operating through a limited company. They offer various benefits in terms of tax optimization, better management of cash flow, financial planning and ultimately peace of mind. By maximising income, allied to a solid financial plan, you can better position your business for long-term success.

Gorilla Accounting are specialist accountants for self-employed people operating through a limited company. For a fixed fee of £110 + VAT per month, you’ll receive full FreeAgent access and all your business and personal accounting needs will be expertly handled by your own dedicated accountant.

They will be on hand to provide unlimited support and advice, including how to pay yourself tax-efficiently and optimise your overall take home pay, and a same-day response to your queries is guaranteed. To speak to an accountant about our services or how to optimise your tax position, call us today on 0330 024 0406 or request a call back.

 

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