Optimal salary guide
If you are the sole employee of your company then the recommended salary is £8,424 (£702 per month).
This guidance applies to the majority of our Contractor and Small Business clients, but not all. Specifically the following must apply:
- You own your company and can take dividends out of it
- You are on the standard 1100L PAYE Tax Code
When we refer to the 2018/19 tax year we mean from 6 April 2018 to 5 April 2019.
Although the personal allowance is £11,850 the threshold where you have to start paying National Insurance is £8,424. If you go over the £8,424 threshold you will have to pay both employees NIC (12%) and employers NIC (13.8%) on the excess. Therefore, to minimise your tax and to simplify your administration you will want to keep the salary below £8,424.
Next Level Business recommends:
- Taking a gross salary of £702 a month, or £8,424 a year.
- On this salary you will not pay any national insurance but don’t worry, it won’t mean your eligibility for government benefits is restricted.
- Taking any earnings over and above this amount as dividends.
That tax incurred on dividends changes in 2018/19 too. Dividends up to the personal tax threshold of £11,850 are tax free, and the first £2,000 of dividends after this are effectively at 0% too meaning in total you will be able to take £13,850 tax free.
After this point you will pay 7.5% income tax on any dividends you take that push your total earnings up to the higher rate tax threshold of £46,350 and then 32.5% on dividends over that amount.
If you are fortunate enough to earn more than £150,000 the rate on earnings above this point goes even higher to 38.1%.
Like in previous years, if you can live off it, we would recommend restricting dividends to the higher rate threshold so taking £37,926 in the year (or £3,160.50 per month).
(£37,926 + £8,424 = £46,350)
That means you keep all your earnings in the basic rate tax threshold. If you have addition- al profits in your company and choose to pay yourself more that is of course fine but you just need to be aware that you will incur additional income tax at a rate of 32.5% per each £1 taken above £37,926
If you meet the conditions at the start, this information applies to you.
If any of the following apply, please contact us. Further discussion and advice is required.
- You have more than 1 (yourself) as an employee
- You don’t own 100% of your company
- You are starting part way through the year
- We assume you are already PAYE registered so you need to set your salary at £670 per month.
- Use the dividend template we provided to record your monthly dividends throughout the year.
- You can use our dividend calculator to work out how much tax you will owe.
Questions? Call us
We’re here to help. Call us on (0) 3450 308 900 and speak with our business advisory specialist who will answer any questions you may have.
Click HERE to request our dividend calculator.
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Get in touch with the Next Level Business team. We have offices in Berkhamsted and London, or we can visit you at your premises. Click here to visit our contact page, or take the first step with a free financial health check by filling out the form down below.