For directors of limited companies it is important to calculate the most tax efficient way to take out money from the company for personal use. Ensuring you have taken advice on the best mix of salary versus dividends, means more net take home pay for you.
Despite changes to the dividend tax system in 2016-2017, dividends are taxed at a lowest rate, compared to tax on salaries. Also, dividends are not subject to National Insurance Contributions (NIC’s) like salaries are.
Salary versus dividends
Getting the right mix of salaries and dividends is vital for good tax planning and typically the aim is to take the lowest salary possible to avoid PAYE (income tax) and NI. After taking a small salary, other drawings can be taken as dividends.
The limits that determine where Income Tax and NI are charged do change frequently, meaning that the recommended salary for a director can also change, in line with new legislation.
Changes to the limits for 16-17
In 2016-2017 the tax-free personal allowance increased from £10,600 to £11,000, meaning £400 of income per year can be earned without being subject to Income Tax.
However, despite this increase to the Income tax limit, the NI limit is more relevant.
The NI limit remained the same for 16-17 so for this current tax year, your director’s salary can remain the same as last year.
Need more help in determining your salary to dividend mix? Are you new to contracting and need more advice in this area?
Tax planning is essential, especially in light of changes to the dividend tax system and the NI limit remaining the same this year. Other ways to save tax can be explored with a qualified, professional accountant.