Tax-efficient profit extraction
This purpose of this blog is to provide general advice on tax-efficient Salary and Dividends withdrawal from your limited company. Sole directors can pay themselves salary and dividends from their company income. However, salary is classed as an expense on company accounts whereas dividends can only be withdrawn from profits after tax. Advice given in this blog is strictly based on illustrative figures only. Company directors should seek professional advice to suit individual business circumstances and tax planning.
Optimum Salary - April 2020 to March 2021
From April 2020, recommended optimum level of salary is £732 / month without incurring any tax or NI liabilities.
Please remember that:
Your Company must be registered for PAYE and file RTI each time you pay yourself a salary.
Paying yourself an optimum level of salary is absolutely legal and acceptable by HMRC.
Dividends – from April 2020
Same as last year, the first £2000 of dividends will remain tax free.
Any dividends above £2000 will be taxed at the following rates:
7.5 % - on dividends within the basic rate tax band (see example for how this is calculated)
32.5% - on dividends above basic rate tax but within the higher rate tax band (over £50,000)
38.1% - on dividends above higher rate tax but within the additional rate of tax (over £100,000)
Please note that dividend tax rate is applied according to the tax rate band within which your total income falls.To keep things simple, following example assumes that you have no other income:
Annual Salary: 12 x £732 f= £8,784
Personal Allowance for 2020/21: £12,500
Tax-free Dividends Allowance: £2000
Total tax free salary + dividends amount: £14,500
Tax at 7.5%
7.5% - on £35,500 of dividends
Snapshot of Income at the Basic Rate Tax Band (up to £50,000 income)
Higher Rates of Dividends Tax
Any dividends amount above £41,216 will be taxed at 32.5%. For dividends above £100k, File Digital recommends that you contact your accountant for professional advice.
Advice and figures illustrated in this blog are for general purposes only for tax rates applicable in England. For specific advice to suit your individual circumstances or if you are a tax resident of Scotland or Wales, please consult your accountant or tax advisor.