Changes in 2019/20 affecting the remuneration strategy for directors
The 2019/2020 tax year starts on 6th April and with it comes a number of changes which will have an impact on how, as a director, you extract money from your company. The following changes have been announced by HMRC;
- Personal allowance and basic rate band have increased to £12,500 and £37,500 respectively.
- Increase in National Insurance (NI) limit up to £8,632
So an annual salary (including bonuses) of £8,632 (or £719 monthly) will still mean neither you nor your company will pay NI, but the good news is you will still receive a full years NI credit to your state pension records.
The employment allowance will stay as £3,000 in the 2019/20 tax year. So as with last year if the company has more than one salaried director or there are other employees but where the employer’s NI paid on their gross pay is less that £3,000 then it may be tax efficient for you to increase your salary to £12,500 per annum but only if you have no other income that will mean you go into the higher rate tax band (total income less than £50,000)
Top up in dividends
As a salary of £8,632 or £12,500 per year isn’t going to pay the bills, you will want to top this up with income which doesn’t count for NI purposes. Usually this means dividends, so you should pay regular dividends, say quarterly, at the most tax efficient level; this will depend on the tax free allowances and rate bands available to you.
Tax paid on your dividends
The amount you are able to take as a tax free dividend is the same as last year at £2,000, for additional dividends you will be charged tax at either 7.5% (within basic rate band), 32.5% (within higher rate band) and 38.1% (in the additional rate band).
So a director who now takes a salary of £8,632 and dividends as detailed below (with no other income) will have the following personal tax to pay;
|DIVIDEND (£)||PERSONAL TAX (£)|
Where you have other tax deductible allowances or reliefs, such as those given for personal pension contributions, you can increase the amount of dividends the company pays you and yet remains tax efficient.
- Ensure that your company is registered for payroll with HMRC and submits its RTI monthly to HMRC in advance of salary payment to ensure that you do not incur any penalties. JLA Accounting can help you with this.
Dividends can only be paid from company profits and so the low salary, high dividend strategy can’t be used where the company does not have sufficient profits to distribute.
The Scottish Government have introduced different tax rate bands for the 2019/20 tax year so if you are a Scottish tax payer then the personal tax amounts may differ for you. The effects on you and your business of the dividend rules can be complex so it is worth seeking tax advice to ensure you have the most tax efficient strategy in place. If you have any questions on this article and how it affects you and your business, please get in touch.
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