The tax rules for dividends changed several years now ago.  As the new tax year has started, we thought we’d detail the most effective 2018-19 dividend and salary combination.

This article assumes that you are not a Scottish taxpayer. Scotland has different rates of income tax for non savings income (e,g, earnings). However just to confuse matters the same higher rate threshold applies to dividend income.

The personal allowance has increased to £11,850 and the basic rate tax threshold has risen to £46,350. Unfortunately though, the dividend allowance has now been reduced from £5,000 to £2,000. You can find further details about tax rates and allowances on HMRC’s website here.

Therefore any dividend income greater than £2,000 will be taxed as follows:

As a result of the changes, If you are basic rate taxpayer, and you receive all your income in dividends you will be up to £2,438 worse off!

Most effective 2018-19 dividend and salary combination:

Latest strategies

So now that we know the latest allowances and rates, how does this effect the most effective 2018-19 dividend and salary combination?

Taking a modest salary and the balance as dividends has long been the most tax effective form of profit extraction for limited company contractors, freelancers and owner managed businesses.  The reasoning is as follows:

Essentially there are now two strategies when determining the most effective 2018-19 dividend and salary combination. Which strategy you choose will depend on whether or not you claim the employment allowance.

The Employment Allowance can currently be claimed where there are two directors who are husband and wife.  This may be challenged by the taxman if both husband and wife can’t prove they work actively in the business.