As the end of the current financial tax year is fast approaching, it’s a good idea to think about whether you have fully maximised the amount you can withdraw from your limited company, tax-free and at the basic rate of dividend tax.
For further guidance about how dividends are calculated, taxed and administered,
read our complete dividends guide.
What can you take tax-free and at the lower rate of tax?
Assuming your company makes sufficient profits, the total tax-free amount you can withdraw, not including other sources of income and using our recommended low wage/higher dividend split, is £14,500 per financial tax year. You can take a further £35,500 of dividends, at the 7.5% dividend tax rate and before the higher rate of 32.5% is charged.
This would generally breakdown as £8,628 salary for the year (£719 per month) and dividends of £41,372.
If you have no other sources of income, have paid a monthly salary of £719 per month and have taken £2,000 per month as dividends, you could withdraw a further £17,372 from the company (if profits and funds are available), prior to 5th April 2020 and you would remain in the basic rate tax band.
Please be aware that this would result in a personal tax liability of £2,662.50 plus a 50% payment on account of £1,331.25. Meaning, that you would have a personal tax liability of £3,993.75 due 31st January 2021 and a further £1,331.25 due 31st July 2021.
The payments on account will offset your 2020/21 self-assessment tax bill, and any payments on account previously made (in January 2020 and due July 2020) will reduce your liability.
When do you need to make dividend payments by?
Final dividends MUST be paid prior to the 5th April 2020, or they will not be included in the current financial tax year’s calculations, and you may lose certain allowances.
What should you withdraw at a lower tax rate?
In most scenarios, it makes sense to withdraw as much money from the company at the lower tax rates, rather than let any reserves build-up for a future year as your circumstances can easily change, as can the tax rates.
There are, as always, certain things that will reduce, or restrict, this tax-free allowance of £14,500 and the additional basic rate dividends of £35,500.
- You only started working through your company since 6th April 2020 and have earned wages from a previous job or have another employment.
- You have other sources of income such as rental property, interest, dividends from shares, benefit in kind or any other taxable income.
- Your company does not have sufficient profits available.
Any questions? We can help, give us a call.
Any of the above will restrict the amount you can take out as dividends before being taxed. If you have received any of the above income, or unsure of what you can take, please get in touch with us in advance, before this financial year-end (5th April 2020).
Over the next two weeks, we will provide our suggestions for next years salary and dividend allowances.