The Autumn Budget 2017 included a few changes to tax and NI limits for the 2018/19 income tax year and here is what you should know:
Tax code changes
The amount you can earn tax free (the personal allowance threshold) has increased by £350 to £11,850 (£11,500 for 2017/18 tax year). Hence the normal tax code (all “L” suffix codes) will increase by 35 for 2018/19 – 1150L becomes 1185L.
The employment allowance (currently £3,000) is still available for 2018/19. This is an employment grant from the government that reduces employer national insurance contributions by £3,000 (for owner managed businesses with 2 or more employees).
The NI thresholds (primary threshold) increases to £8,424 per year, which means there are no employee or employer NI contributions on earnings below £162 per week, £702 per month and £8,424 per year.
An employee under 21 is exempt from paying NI contributions so check that you are using the correct NI letter (M). This also applies to apprentices under 25 when the NI code should be H.
Optimum salaries and dividends
The optimum salary at which no income tax (PAYE) is due will be £11,850 per year (£987.5 per month). This will however attract NI contributions of approximately £883.91 per year (£73.66 per month). This will be lower where you qualify and are eligible to utilise the employment allowance of £3,000.
You may however consider taking a salary at the NI primary threshold of £8,424 and you will not have to make NI contributions.
Note that making the minimum NI contributions on an annual salary of £11,850 ensures your state pension account is active.
At a salary of £11,850 per year, you will be able to take a further £2,000 in dividends tax free (the dividend allowance is reduced to £2,000 on 06 April 2018 – previously £5,000).
At a salary of £8,424 per year, you will be able to take a further £3,426 in dividends tax free – because you will still be within the tax free earnings limit for both salary and dividends.
You have to be a shareholder to receive dividends and you may also want to consider minimum wage legislation (legislation does not apply to directors who don’t have an employment contract).
Taking further money out of your limited company
The optimum remuneration above is a strategy to maximise relevant tax allowances. These methods will however not provide you with enough cash!!!
Further cash can be extracted from the business in the following ways:
- Additional dividends – this will suffer tax of 7.5% up to the basic rate limit. Higher tax rates will apply above this.
- Expenses – reimbursements for expenses incurred on business.
- Director’s Loan Account – you can potentially borrow up to £10,000 from the business as a loan – this can become complex if not paid back and guidance should be taken from your accountant.
If you would like to discuss issues arising from this article or to find out more on the applicable tax exemptions, please contact Tobi Lab on 0330 311 2983 or send us an email (firstname.lastname@example.org).