There have been several tax changes in the Budget:
- Changes to Personal Allowances –
The Personal Allowance is the amount of income you can earn before you start paying Income Tax. This is currently £10,600 – it will already rise to £11,000 in 2016, and will now increase further to £11,500 in April 2017.
The point at which you pay the higher rate of Income Tax will increase from £42,385 to £43,000 in 2016 and to £45,000 in April 2017.
- Employment Allowance – The employment allowance is £3,000 but there is a restriction on it being used by single person companies.
- Dividend Tax -From April 2016 you’ll pay tax on any dividends you receive over £5,000 at the following rates:
- 7.5% on dividend income within the basic rate band
- 32.5% on dividend income within the higher rate band
- 38.1% on dividend income within the additional rate band
This simpler system will mean that only those with significant dividend income will pay more tax.
The Dividend Allowance will not reduce your total income for tax purposes. However, it will mean that you don’t have any tax to pay on the first £5,000 of dividend income you receive.
Dividends within your allowance will still count towards your basic or higher rate bands, and may therefore affect the rate of tax that you pay on dividends you receive in excess of the £5,000 allowance.
These changes also make it more complicated in deciding whether to incorporate, so I have added a new calculator to help you decide https://stevejbicknell.com/tax-calculators/
The £5,000 dividend allowance is a bit confusing because its an allowance and not an exemption, so it becomes part of your overall income.
Basically, most small business owners will either choose £8,060 as a salary (free of tax an NI) or £11,000 (tax free)
Because your salary is tax deductible in companies the difference £11,000 – £8,060 = £2,940 plus 13.8% NI = £3,345.72 which saves 20% corporation tax = £669.14
There will be NI to pay 12% employee and 13.8% employer = 25.8% x £2,940 = £758.52 – £669.14 = £89.38 net tax
Beyond this you will pay income tax at 20%.
So in summary, I think the optimum salary is £11,000.
Above this you should take dividends.
This is a simplification and you should speak to your accountant about your specific tax affairs.