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The most tax efficient way to pay yourself in 2018/19

The last tax year ended 5th April and the 2018/19 started on the 6th, meaning that new rules and allowances apply – so you need to find the most tax efficient way to pay yourself in 2018/19.

The Personal Allowance – the amount anyone can earn tax free – has increased to £11,850, the tax-free Dividend Allowance has fallen from £5,000 to £2,000, and the National Insurance threshold has increased to £8,424.  So, what does all that mean for anyone trying to pay themselves in the most tax efficient way?

Well, even after all the changes, the most tax efficient way of paying yourself is still taking a salary up to the national insurance threshold, and then taking the remainder as dividends.

By taking an annual salary of £8,424 a year – or £702 per month – you will earn enough to get your national insurance credit towards pensions etc, but not actually have to pay any national insurance on it.  Take the rest as dividends as the tax rates on those are lower than on salary, and you have an additional £2,000 tax free allowance on those as well.

If you follow the above, and then take dividends of £3,160 per month and put aside £203 a month for tax, you will use up all your personal allowance, all the dividend allowance, not pay any national insurance and stay under the higher rate band, meaning you won’t be paying tax at the higher rates.

Once you earn over £100k, you start to lose your personal allowance at a rate of £1 for every £2 you go over, so by the time you have earnings of £123,700 you will have lost it all, costing you at least an extra £3,851 in additional tax.

Obviously, there are other factors that come into play here that may prevent you from being tax efficient.  Your company may not have sufficient profits to take dividends, you may need to pay yourself over £46,350 so you pay higher rate tax, and you may need to go over the £100k meaning you lose your allowance.  This will also change if you have income from other sources like rental income, interest income or other dividends.

If you are unsure how to be most tax efficient then contact us on the details above.