How much can I pay myself without paying higher rate tax?

Limited company owner asks

How much can I pay myself from my company without paying higher rate tax?

Acumenica answers:

The quick answer is: 

£758 pcm salary

£3,431 pcm dividend (income depending)*also both depend on income received from PAYE/other sources to date

The more detailed answer is:

How much you can pay yourself, and in what combination, will depend on factors such as how much income you have had in the tax year from other sources. But if we assume that you have none, then the tax thresholds are as follows:

Basic Rate: Income up to £50,270 is taxed at 20%.

Higher Rate: Income from £50,271 to £150,000 is taxed at 40%.

Additional Rate: Income above £150,000 is taxed at 45%.

Dividend taxation also has its own rates:

Basic Rate: Dividends within the £2,000 dividend allowance is tax-free.

Dividend Allowance Exceeded: Dividends above the £2,000 allowance is taxed at 7.5% in the basic rate, 32.5% in the higher rate, and 38.1% in the additional rate.

Salary

In terms of salary. we advise one of two amounts: either £758 per month or £1048 per month. The rate of £758 per month is the maximum that can be received without incurring any tax or NI deductions. Above that level the company will begin to pay employer's NI contributions. Many clients choose to stay on this salary level for simplicity as this means they don't need to worry about making additional payments to HMRC for PAYE. The rate of £1,048 per month is the maximum you can receive without incurring deductions for tax or employee's NI. This is recommended for companies with two (or more) employees, as the employment allowance means there are also no employer's NI deductions at this rate. However, it is also slightly more tax efficient for a single employee, in that you can save just over £200 per year due to corporation tax relief compared to the additional NI cost.

Dividend

Once you’ve established your salary, it’s a simple matter of paying a dividend to use of the rest of the basic rate band. So, if you choose to pay a salary of £758 per month, the max dividend you can receive is £41,174. If you choose the higher salary of £1,048 per month, the max dividend would be £37,694.

Remember these figures apply to each individual. If there are two or more directors/shareholders in the company, each can receive income from the company as above.

Since tax rules can, and do, change, you should always contact a tax professional who can provide you with the most current and accurate advice based on your specific financial situation and the latest tax regulations. Acumenica’s tax team can be contacted by completing the form on the Contact Us page.