The new tax year started on 6th April, with new rates and allowances, and so now is the time for small business owners that trade as a company, to review the way in which profit is taken out from the company for your personal income.
The new personal allowance for 2019/20 is set at £12,500 and the basic rate of tax remains at 20%. The 40% band kicks in at £50k.
The dividend allowance for 2019/20 is £2,000 after which at basic rate dividends are taxed at 7.5%. At higher rate they are taxed at 32.5%.
The employment allowance, given to small employers, remains at £3,000 – the level of national insurance liability below which none is paid.
It remains a generally acceptable tax strategy that a small amount of profit is extracted as a salary, with further profit taken as dividends.
In order to qualify for the full state pension an individual needs 35 qualifying years of contribution. Set at the correct level this can be secured without actually having to pay any National insurance.
This level is to earn between £6,136 and £8,632 per year.
So maximum benefit is achieved with a salary of £8,632 per year or £719 per month.
Even if the individual has already achieved the 35 qualifying years, where a company has achieved above full benefit from the employment allowance and pays employers National Insurance, this is still the most tax efficient rate of payment.
Where the company makes use of the employment allowance, and employers National Insurance does not exceed it (£3k) for the year, it is beneficial to pay up to the personal allowance, ie £12,500 per year, £1,042 per month.
This is because although the individual suffers employees National Insurance at 12% of salary above £8,632, this National Insurance is able to offset profit and Corporation Tax at 19%.
Where we complete your payroll we shall set these figures for you in the draft approval payslips we prepare for you for April.
Where you may be at the cusp of employers National Insurance rising above £3k for 2019/20 we will opt a decision, for your confirmation.