As the end of the current financial tax year is fast approaching, it’s a good idea to think about whether you have fully maximised the amount you can withdraw from the company tax free and at the basic rate of dividend tax.
If you are not a Scottish tax-payer, please click here as your tax rates and allowances are different.
Scottish rates and bands for 2017/18
|Scottish Income Tax||Rate||Scottish bands|
|UK Personal Allowance||0%||Up to £11,500|
|Scottish Basic Rate||20%||Above £11,500 up to £43,000|
|Scottish Higher Rate||40%||Above £43,000 up to £150,000|
|Scottish Additional Rate||45%||Above £150,000|
Assuming your company makes sufficient profits, the total tax free amount you can withdraw, not including other sources of income and using our recommended low wage/higher dividend split, is £16,500 per financial tax year. You can take a further £28,500 of dividends, at the 7.5% dividend tax rate and before the higher rate of 32.5% is charged. This would generally breakdown as £8,160 salary for the year (£680 per month) and dividends of £36,840.
For example, if you have no other sources of income, have paid a monthly salary of £680 per month and have taken £2,000 per month as dividends, you could withdraw a further £12,840 from the company (if funds are available) prior to 5th April 2018 and you would remain in the basic rate tax band. Please be aware, that this would result in a personal tax liability of around £2,137.50 plus a 50% payment on account of £1,068.75. Meaning that you would have a personal tax liability of £3,206.25 due 31st January 2019 and a further £1,068.75 due 31st July 2019. The payments on account will offset your 2018/19 self-assessment tax bill and any payments on account previously made (in January 2018 and due July 2018) will reduce your liability.
Please Note: Final dividends MUST be paid prior to the 5th April 2018 or they will not be included in the current financial years calculations and you may lose certain allowances.
In most scenario's it makes sense to withdraw as much money from the company at the lower tax rates, rather than let any reserves build up for a future year as your circumstances can easily change, as can the tax rates.
There are, as always, certain things that will reduce, or restrict, this tax free allowance of £16,500 and the additional basic rate dividends of £28,500.
- You only started working through your company after 6th April 2017 and have earned wages from a previous job or have another employment.
- You have other sources of income such as rental property, interest, dividends from shares, benefit in kind or any other taxable income.
- Your company does not have sufficient profits available.
Any of the above will restrict the amount you can take out as dividends before being taxed. If you have received any of the above income, or unsure of what you can take, please get in touch with your accountant, well in advance of the year end (5th April 2018). Please ensure your portal is up to date and provide any additional income to enable them to confirm the available dividends and provide estimates for the tax liability.