The 2018 Budget increased the tax and NI bands from April 2019. They won’t be increased again until April 2021. Therefore, the resulting tax saving has the appearance of being more generous than it actually is as there are changes to NI contributions to factor in.
From 6 April 2019 the tax-free personal allowance will rise from £11,850 to £12,500 and the basic rate band from £34,500 to £37,500. The maximum tax savings for 2019/20 which result if your income is anything other than dividends are £730, £860 and £600 for basic rate, higher rate and additional rate taxpayers respectively.
As dividend tax rates are different, the tax savings are also different. For basic rate, higher rate and additional rate taxpayers the maximum savings are £799, £961 and £750 respectively.
NI extra charges
If any of your income for 2019/20 will be in earnings, i.e. salary or profits, on which NI is payable, a greater amount of contributions will be payable compared with 2018/19. Where your earned income is from a single source, e.g. salary from one company or profits from one business, and it exceeds the new annual earnings upper earnings limit of £50,000, you’ll pay an extra £413 in NI if you’re an employee or director or £310 if you’re self-employed or a partner, compared with 2018/19. The extra NI will eat into the tax savings.
If you’re an employee, self-employed or in partnership you can’t manipulate the type of income you receive. As a director/shareholder you may be in a position to take more or less income as salary or dividends to make the most of the changes. For 2019/20 you’ll gain the greatest advantage by taking a salary of £8,632 for the year. Dividends, considering of all your other taxable income and reliefs, should use all your basic rate band. This would save you £860 tax with no extra NI to pay.