Every tax year the government changes the tax allowances and the tax thresholds at which you move from paying the basic rate of tax into paying the higher rate of tax. Below is a guide to how your personal income from your company will be taxed in the current tax year - 6 April 2019 to 5 April 2020.
1. You are an English or Welsh tax payer, Scotland has it own tax bands so the below will not apply to you if you are a Scottish tax payer.
2. You have no other income sources. If you rent a property out or have income from lots of savings or foreign income then again the below will not be accurate to your specific situation.
The Personal tax allowance is currently £12,500 which means the first £12,500 of your personal income is tax free.
The Dividend tax allowance is currently £2,000 which means that the first £2,000 of dividend income once the Personal tax allowance has been used up is also tax free.
This means you can receive up-to £14,500 of personal income tax free.
Above the personal tax allowance and the dividend tax allowance the next £35,500 of income will be taxed at the basic rate (£12,500 + £2,000 + £35,500 = £50,000). The basic rate for salary income is 20% where as the basic rate for dividends is 7.5%.
Once you cross the £35,500 amount you enter the higher rate of tax where income is taxed at 40% for salary and 32.5% for dividends.
There are also a range of further tax bands if you claim child benefit and earn over £50k or if you earn over £100k. These tax rates are very aggressive and should be avoided by instead of taking money out of your company, transferring it into a pension or by simply leaving it in the company and not drawing it.
Tax efficient withdrawals
The most tax efficient salary for 2019-20 is £8,628 which is £719 per month.
Above this point you have to start paying National Insurance on your salary and it becomes less tax efficient.
By taking £8,628 in salary you are left with £41,372 before you reach the higher rate tax band (£50,000 - £8,628) which you can take as dividends. Your income will then be taxed as follows:
- Salary of £8,628 tax free covered by your personal tax allowance
- First £3,872 of dividends tax free covered by your remaining personal tax allowance
- Next £2,000 of dividends tax free covered by your dividend tax allowance
- Remaining £35,500 of dividends taxed at 7.5% = £2,662.50
You will personally have received £50,000 in income from your limited company and will need to pay £2,662.50 of this income in income tax through your personal tax return. This will leave you with £47.337.50.
This is an overall tax rate of 5.3% which is very tax efficient.