So, it’s a new tax year and new increased rates for 2019/20. In this article, we show you how this works in practical terms and how to be as tax efficient as possible.
There are two main scenarios for suggested salary levels:
- £8,632 if you are the only employee in your company.
The employment allowance is not available for sole director/employee companies. A salary of £8,632 will not attract any NI liability but it is still high enough for you to obtain your state pension entitlement for the year.
- £12,500 if you have more than one employee (e.g. a spouse)
Having more than one employee through the business will mean you can claim the employment allowance, this will reduce the employer’s NI and overall the corporation tax relief will outweigh any employee’s NI due.
Any salaries through your company are a business expense, and therefore you will gain corporation tax relief. With the salary levels being below the personal tax free allowance, no income tax will be incurred either.
We will be reviewing clients with existing salaries based on their individual circumstances and adjusting salary levels to the most tax efficient levels. The salaries will be updated and available to view in the ‘payroll’ section on FreeAgent.
The basic rate tax band has increased to £50,000, and so providing your total income does not exceed this, you will avoid personally paying higher rate taxes.
With this in mind, you can also therefore take more dividends from the company before hitting the 32.5% tax rate. Assuming, you have no other income than the salary through the company, the dividends to maximise the remaining basic rate band will be:
- £41,368 per year (6 April to 5 April) or £3,447 per month, if you are on a salary of £8,632 per year.
- £37,500 per year (6 April to 5 April) or £3,215 per month, if you are on a salary of £12,500 per year.
If you do have any other income, you will need to reduce the dividends if you want to remain below the higher rate tax threshold.
The tax due on dividends is a personal tax liability and will be payable annually on your self-assessment tax return. This will be due by the 31 January following the end of the tax year. Once you have taken account of any other income, tax on dividends is at the following rates:
The first £2,000 in dividends will be tax free. Above this dividends will be taxed as follows:
- 7.5% for basic rate tax payers (on dividends falling below £50,000)
- 32.5% for higher rate tax payers (on any dividends above £50,000 per year)
- 38.1% for additional rate tax payers (on any dividends above £150,000 per year)
Payments on account
You will need to consider, that if your total personal tax liability is more than £1,000 in the tax year, HMRC will expect payments on account for the following tax year as well.
So, if you have a liability of £2,600 for the year ended 5 April 2019, your tax payable would be:
Due 31 January 2020 – £3,900.00 made up as:
£2,600.00 – balance of tax for the year ended 5 April 2019 (but reduced by payments on account made previously)
£1,300.00 – 50% of tax for the year ended 5 April 2020
Due 31 July 2020 – £1,300 made up as:
£1,300.00 – remaining 50% of the tax for the year ended 5 April 2020
- Surplus profits
One of the main benefits of being a limited company contractor is the flexibility to decide how much tax you pay. The most tax-efficient method will be to take dividends and salary based on the above examples and for any additional profits to remain in the company.
With the profits building up, you have a few options:
- Invest in the company name e.g. shares, bonds, property. If you are thinking about this, please let us know as we can then discuss the options to make sure you retain any entitlement to entrepreneur’s relief.
- Contribute into a pension scheme. This option is becoming more appealing, the tax advantages being; the company would receive corporation tax relief at 19% and you, personally would be taking less in dividends therefore saving on any personal tax liability. Plus, there’s the added benefit of being able to draw down on your pension from 55.
- Make further dividend payments, but you need to bear in mind that you will incur the higher rate (32.5%) or additional rate (38.1%) tax. However, depending on your appetite to risk, there are ways to reduce the tax liability; for example income tax relief on EIS, SEIS and VCT investments.
- You can leave the profits to build up in the company and then when you come to cease contracting you could either:
- Draw out tax free dividends of £2,000 per year
- You could liquidate the company and distribute the total profits in one lump sum, but this will be taxed at 10% using entrepreneur’s relief subject to the new 2 year rule.
The Corporation tax rate will remain at 19% from April 2018 but is expected to reduce to 17% from April 2020.
How can Aardvark Accounting help?
We can help you to get your head around the changes, and simplify the jargon for you. Plus, make sure you that you are on the right track so you’re being as tax efficient as possible based on your circumstances.
Plus, with easy to use software which can be completed on the move with a handy app where you can upload receipts, then you’ll always be up to date with your accounting records. You’ll never have to work out which rate to use each quarter, this can be done by us as part of the monthly service for £69+VAT.
The best value for personal service and tailored accountancy packages to suit you. You’ll always have someone on hand to put your mind at ease. Contact Aardvark Accounting today, we’re all ears and we’ll do the “aard” work for you!