Extracting monies from your limited company     Optimal Directors Salary & Tax on dividends 2019/20

  • By stephensontilley
  • •
  • 10 Apr, 2019
  • •

This article is relevant for contractors or freelancers working through their own UK limited company on contracts within the privatesector and small businesses with one or two directors / shareholders.

Extracting monies from your limited company in the most tax efficient way usually involves a combination of taking a low salary and declaring some dividends.

Main changes (effective from 6th April 2019)

Income Tax

Tax Thresholds

£

Rate (%)

Personal allowance

12,500

0%

Basic rate threshold

37,500

20%

Higher rate threshold

50,000(was £46,350)

40%

Upper rate threshold

Over 150,000

45%

This means any income between £12,501 and £50,000 will be taxed @ 20% and any income above £50,000 will be taxed at the higher & upper tax rates.


Dividend income

Tax Bands

£

Rate (%)

Dividend allowance

2,000

0%

Dividend ordinary rate

37,500

7.5%

Dividend upper rate

50,000

32.5%

Dividends additional rate

Over 150,000

38.1%

This means that if you are a basic rate tax payer and have more than £2,000 of dividends, these will be taxed at 7.5%

So, if your only income was dividend income you could receive £14,500 of tax free dividend income in 2019/20. This is due to both your £12,500 personal allowance and also the £2,000 dividend allowance.

National Insurance limits:

Limits / thresholds

£

Description

Lower earnings limit

6,136

You need to earn above this limit to protect your entitlement to the state pension. You won’t necessarily have to pay any NI at this limit.

Primary threshold

8,632

If you earn above this limit you will start paying National Insurance

 

Please find below a summary of the most tax efficient salary and dividends structure for the new 2019-20 financial year.

1)     Optimal Director’s salary

This year, I would recommend a figure of £715/month or £8,580 a year.

This is just below the point at which you start having to pay National Insurance, (the primary threshold) but is sufficient to ensure you receive a full credit for the state pension (the lower earnings limit)

2)     Dividends

The remainder of your remuneration package will be in the form of dividends (which will be subject to tax at 7.5% up to the basic rate threshold of £50,000)

However, you will get the first £5,920 tax free, as you have £12,500-£8,580 still to use of your personal tax free allowance plus your dividends allowance still to use.


Example:

Someone taking £50,000 out of their company this year will result in a personal tax liability of just over £2,600.

The calculation looks like this:

Salary         £8,580

Dividends £41,420

Total           £50,000

 

First £12,500 covered by personal allowance

Next £2,000 covered by dividend allowance

Remaining £35,500 tax at 7.5% = £2,662.50

As dividends can only be declared on profits after tax, I will monitor your profits quarterly to ensure you are on track and discuss accordingly.

Please note:

Key assumptions made in this article:

  • You are a UK resident tax payer with a standard personal allowance
  • Your only source of income is your salary and dividends from your limited company
  • Assumption being that you are operating outside of IR35 (private contracts)
  • This has been written based on the available information at the time
  • There are other things that could affect the final tax bill (e.g. student loan repayments, child benefit high income tax charge and the withdrawal of the personal allowance once your income exceeds £100,000

Changes to Director's Self-Assessment Tax Returns

By stephensontilley • January 28, 2019

In December 2018, the guidance was amended as to when a director must file a tax return.

Previously, the guidance stated that all directors must file a tax return despite this not being provided for anywhere else in the tax legislation.

The guidance now states that where all of an individual’s income is taxed at source and there is no further tax to pay they do not need to notify HMRC of chargeability and do not need to file a Self-Assessment tax return.

In addition, the guidance no longer specifically states directors must file tax returns.


Pension contributions (for Directors)

By stephensontilley • December 3, 2018

Pension contributions can be paid both personally and by the company. At the moment, it is often tax efficient in most cases to get your company to make pension contributions, although this may change in the future.


2018 Autumn Budget

By stephensontilley • December 3, 2018

Personal allowances and tax thresholds

From 6th April 2019

·      Personal Tax-free allowance: £12,500

·      Basic rate limit: £37,500

·         Higher rate threshold: £50,000 (an increase from £46,350)

Income tax rates

 

These will remain the same:

·      Basic rate - 20%

·      Higher rate - 40%

·      Upper rate - 45%

Dividend income tax rates

The dividend allowance currently allows the first £2,000 of dividends that would otherwise be taxed to be paid tax-free, this will remain the same for 2019-20.

The dividend tax rates remain the same which are:

Over and above the £2,000 dividend allowance any dividend income is taxed as follows:

·      If you have any un-used personal allowance then that element is tax free

·      Any dividends in the basic tax band attract a tax charge of 7.5%

·      Dividends above the basic tax band are charged at 32.5%

·      Any dividends in the upper tax band (£150,000+) are taxed at 38.1%.


Travel & Subsistence (for limited companies)

By Louise Stephenson • November 6, 2018
You must be working away from your normal place of work at a temporary workplace to be able to claim for the travelling expenses to get to that temporary workplace. There are special rules which cover employee travel, these are summarised as follows:

Journey from and to
Home > Permanent workplace: Ordinary commuting = Disallowed
Workplace > Workplace: Business travel = Generally allowed 
Home > Temporary workplace: Business travel = Allowed
Home > Depot: Ordinary commuting = Disallowed
Home > Sales patch: Ordinary commuting = Disallowed
Workplace > Client/business function: Business travel = Allowed

A temporary workplace is defined as one which an employee visits for a limited or temporary purpose, for a duration of less than 24 months.

Contractors

For most contractors, their office at home is their permanent place of work and their clients’ offices are their temporary workplaces.

However, please be aware of the 24-month expenses rule, which says that after 24 months consecutive work at one location a contractor can no longer call this place a temporary workplace and can no longer claim expenses.

Also, if a contractor creates a limited company specifically for the purpose of working on a particular contract at a single location, with no other contracts before or after, they will find it hard to convince HMRC that their expenses claims are legitimate.

Trivial benefits (for limited companies)

By Louise Stephenson • November 6, 2018
These are small perks that an employer can provide to their employees without having to pay tax on them. Trivial benefits that are exempt from income tax are automatically be exempt from Class 1A NIC from 6 April 2016.

Trivial benefits will mainly consist of gifts to staff or members of their family on special occasions such as Christmas, birthdays, marriage or the birth of a child.

Conditions:
  • They cannot be more than £50 per benefit (1p over and the full value of the benefit is taxable)
  • Benefit must not be a cash payment - however gift vouchers are allowed (but only as long as they cannot be exchanged for actual cash) Gift vouchers must be purchased at separate times from online retailers (e.g. Tesco/Amazon) otherwise they are viewed as a single benefit.
  • There is no entitlement to the benefit as part of the employee’s contract (including salary sacrifice schemes).
  • It is not provided in recognition of a work-related service or employment duty.
  • The exemption is an ‘all or nothing’ exemption: if the value of the benefit is £60 then the full amount of £60 is taxable, not just the £10 excess.
  • Directors, office holders and employees who are members of their family and household are subject to an annual cap of £300.
Examples of what is allowed:
  • Flowers
  • Chocolates
  • Wine (not vintage wine for investment)
  • Hampers
  • Taking staff for meal
Examples of what is NOT allowed:
  • Providing a working lunch for employees (because this is related to their employment).
  • Gifts, incentives or events related to performance targets or results.
  • Gifts, incentives or events in relation to employment services e.g. team-building events.
  • Taxis when employees work late
  • An ongoing or reoccurring cost. e.g. yearly gym membership/annual broadband
Examples

Scenario 1: Celebrating Birthdays
You take a group of your employees out for a meal to celebrate their birthdays. Five employees attend the meal at a cost to you of £240. Each of the employees choose a different selection of food and drinks. The cost per head works out at £48, if the bill is split evenly. This can be covered by the exemption since the cost for each individual does not exceed the trivial benefit limit.

Scenario 2: Staff Parties
As director, you decide you want to provide your employees with two annual functions, one at Christmas and one in the summer. The first function costs £140 a head and the second costs £40. The first function is exempt by virtue of the annual parties function exemption. The second would be considered a trivial benefit in kind because it does not exceed £50.

Scenario 3: Director Benefits
As a director you are provided with 3 bottles of wine that cost £30, £40 and £50 respectively in a single tax year. The total cost of the benefits is £120. The total cost does not exceed the annual exempt amount of £300 and all of the benefits can be covered by the exemption.

HMRC Example 1
Mr and Mrs Smith are directors of a close company and their daughter Jo is an employee.
  • In October Mrs Smith receives a bottle of wine from the company for her birthday.
    - The cost to the company is £30 and this amount is deducted from her annual cap of £300, leaving her an available exempt amount for any future trivial BIKs in the tax year of £270.
  • At Christmas Mr and Mrs Smith both receive a gift from the company that cost the company £50 each, and their daughter receives a gift costing £25.
    - As Mr Smith has not received any other trivial BiKs, the cost of the Christmas gift is deducted from his annual cap of £300, leaving him an available exempt amount for any future trivial BiKs in the tax year of £250.
    - For Mrs Smith, the cost of her Christmas gift is deducted from her available exempt amount of £270, leaving her an amount to set against any further trivial BiKs in the tax year of £220.
    - Jo is an employee, but as she is also a member of the directors’ family, an annual £300 cap applies to her. The cost of her Christmas gift must be deducted from her cap, leaving her with an available exempt amount of £275 for any future trivial BiKs in the tax year.  
Comment: Jo is a member of Mr & Mrs Smith’s family and so benefits provided to her are subject to an annual £300 cap. She is an employee of the company in her own right and so she has her own cap of £300.

HMRC Example 2
Peter and his brother George, are directors of a close company. They have a sister, Sarah, who is not an employee of the company. Due to the provision of eligible trivial BiKs earlier in the tax year, Peter has an available exempt amount of £55 and George has £95.

At Christmas they are each provided with a turkey by the company, each costing the company £50.
  • The available exempt amount for both Peter and George will be reduced by the cost of their own turkeys, leaving £5 and £45 respectively.
  • As Sarah is not an employee, the cost of her turkey must be allocated equally between any employees who are members of her family or household and directors or other-office holders of the company.
  • This means that an amount of £25 (£50/2) will be allocated to each of her brothers and deducted from their available exempt amounts.
  • Peter will exceed his annual exempt amount of £300, as he only has £5 available. As the exemption is an all or nothing provision, he will be liable to tax on the full allocated amount of £25.
  • George’s available exempt amount is sufficient for the allocated amount to be fully covered, and he has £20 (£45-£25) available for any future trivial BiKs in the tax year.