At Accounts & Legal we always work with our clients to ensure that cash is extracted
from their business in as an efficient manner as possible. The Chancellor of the Exchequer announced that from the 6th April 2017
several new changes that will have an effect on how business
owners withdraw money
from their businesses.
Personal allowance changes in the 2017-18 tax year
The personal allowance
has increased this year to £11.5k – up from £11k last year – meaning that you can take home up to £11.5k tax
free in 2017-18 tax year
. For any earnings over £11.5k and under £45k you will be taxed at 20% and anything over £45k the tax rate will be 40%. There are further tax bands but for simplicity we will keep things simple for now.
Tax on dividends
For the 2017-18 tax year there have been major changes to the treatment of dividend income
with the dividend tax
credit system replaced by a flat rate scheme
will now be subject to tax bands with the first £5k tax free and anything over £5k treated in the following way.
Firstly, any unused personal allowance
may be used up tax free – e.g. if you received no salary
you could receive dividends of £16.5k (£11.5k + £5k) tax free
Secondly, the basic tax band of up to £45k will be taxed at 7.5%
Finally, dividends above the basic tax band will be taxed at 32.5%. Again, there are further tax bands but for simplicity we’ll leave it here.
How to put this into practice
Firstly, we typically recommend taking a low salary of the personal allowance. This allows you to receive your NI stamp
and maximise your tax-free element.
Any additional amounts over and above the personal allowance threshold should be extracted as dividends allowing you to utilise the tax free dividends allowance
and move onto the lower tax rate bands that dividend income attracts.
Let’s take an example: let’s assume that you would like to extract income of £40k from your business
and pay a minimal amount of income tax
. You record a salary of £11.5k and take the remaining £28.5k as dividends. Of that £28.5k, £5k are tax free
leaving £23.5k which will be taxed at the basic dividend tax rate
of 7.5%, leaving a tax liability
of £1.76k or an effective tax rate of 4.4% on income in the year. Leaving you with £38.24k cash in hand at the end of the year, significantly better off than if you had taken the income as a salary.
If you would like to know what is most tax efficient way to withdraw money from your company, get in touch with one of our team of accountants who can support you in structuring your business to work for you.