With the arrival of the new financial tax year in a little over a month, it’s a good time to think about the inevitable changes in the tax allowances and rates and how they might affect the amount of tax you might have to pay.
As a contractor, operating through a limited company, we’d nearly always advise a salary and dividend structure to maximise the amount of take home pay you might expect.
With that in mind, starting from 6th April 2018, the tax rates are as follows: –
- Personal Allowance – £11,850 (Up from £11,500)
- Basic Rate – Up to Total Earnings of £46,350 (Up from £45,000)
- Higher Rate – Between total earnings of £46,351 and £150,000 (Same top band as last year)
- Additional Higher Rate – Above £150,000 (as last year)
- Dividend Allowance – £2,000 (reduced from £5,000)
What does this mean in reality?
Based on what we would recommend, this means that the following tax rates will be relevant: –
- Directors Salary – £8,424 (£702/month) – £0 Tax
- Dividends – £5,426 (£452/month) – £0 Tax
- Dividends – Next £32,500 (£2,708/month) – 7.5% Tax
- Dividends – Next £53,650 (£4,470/month) – 32.5% Tax
To remain in the basic rate tax bracket, you’ll need to take dividends of £37,926 or less throughout the tax year. If you take exactly £37,926 in dividends and have no other income other than your director’s salary, you will have personal tax payable of £2,437. Tax for the 2018/19 tax year is payable 31st January 2020.
However, when you exceed £100,000 of income over the year, your personal allowance will start to reduce resulting in more tax to pay.
Any other considerations?
Confusingly, there are additional factors that may cause the above calculations and rates to change – tax is always taxing!
For example, if you had a combined salary and dividend income of £30,000, you would pay student loan repayments of £1,050.30 (plan 1) or £450.00 (plan 2).
If you are close to the end of your student loan, it may be worth contacting the Student Loan Company to see if paying it off is the best option.
If you have children, you do not escape additional payments depending on the level of your total income.
If you earn the highest in your household you need to log this on your tax return and consequentially, if that income exceeds £50,000 you will be asked to pay a proportion back. Once your income is above £60,000 the proportion you pay back is 100% of the child benefit received.
For example, if you have earned £52,300, you would pay back 23% and so on until income exceeds £60,000.
However, it still might be worth claiming child benefit and benefiting from the additional short-term income before having to pay it back on your next tax return (for example investing the money in a bank account to earn interest). If you prefer to keep things simple you can just ask for the child benefit to be stopped.
Payment for both student loan repayments and child benefit repayments would be payable alongside your tax payment, due 31st January 2020.
Obviously, this is a simplistic view on a simple income structure that typically you might fall within. There are plenty of other factors and additional income sources that will change the advice we may provide you. If you have any other additional income or think you do not fit under this scenario please contact us and we can discuss your specific needs…