2019-20 Tax Planning for Limited Companies
March 27, 2019
The Scottish parliament now has a progressive income tax system with new rates which means tax payers need to be even more aware of how their employment and savings income will be taxed differently.
The dividend allowance is set for the UK as a whole and has reduced to £2,000 from April 2019 which means any dividend income over £2,000 is assessed under income tax at 7.5% basic rate (and then 32.5% higher rate) .
For owner managed limited companies, who can decide on the level of salary and dividend to pay themselves, tax planning has becomemore complicated. So much for the Office of Budget Simplification!
So what needs to be considered?
- Does the company have one or many directors? If many, then the employment allowance for employer national insurance is available and this will reduce the amount of employer national insurance that needs to be paid by up to £3,000 per annum
- Does the company owner have a spouse who has an unused portion of basic rate allowance?
How can owner managers plan the most tax efficient strategy?
Sole director companies
- For 2019-20 a sole director should pay a salary just over the National Insurance threshold of £8,700 (£725 per month).
- Then withdraw any further cash from the company via dividend.
- There will be a small amount of National Insurance to pay by April 2020 of £18. By paying National Insurance there will be a qualifying year for State pension.
- There will be an impact on income tax with more dividend income being paid – if the income tax payable exceeds £1,000 payments on account will need to be made in January and July of each year which have a cash flow impact in the first year of making payments on account. This is because there is a switch to HMRC collecting income tax in advance as opposed to arrears.
Companies owned by multiple directors
For companies owned by two or more directors, the more complex income tax system for Scotland now means tax planning must be done specific to their particular personal circumstances.
Where a company is owned and managed by more than one director, existing sources of income (e.g. rental property, investment income) need to be considered for each specific director and, if relevant, their spouse and this may have an influence on how to set salary and dividend payments for the company for 2019-20.
I have modelled a scenario for a Limited company, with both directors owning a 50% share of the company each. Based on two different operating profit levels of £30,000 and £70,000, the optimum tax/ dividend split is to pay a £12,500 annual salary to both directors out of the Limited company and extract any further cash out of the company as dividend which will be split equally.
The UK basic rate threshold (as opposed to the Scottish threshold) of £50,000 (£37,500 + £12,500 personal allowance) will apply because dividend income is savings income.
In this scenario, £100,000 profits can be extracted out of the company at basic rate and the corporation tax liability will be reduced by £2,375 for the salary. The National Insurance payment due will be £464 each i.e. £928 in total, payable over January and April 2020.
A summary of relevant tax rates for Scottish registered companies in 2019-20 is shown below:
|Scottish intermediate rate threshold (for earned income not savings income)
|UK-wide basic rate threshold (for savings income e.g. dividends)
|Class 1 National Insurance rate – employee
|Class 1 & 4 National Insurance primary and secondary threshold (no National Insurance payable below this threshold)
|Dividend tax rate –basic
|Dividend tax rate –higher rate
|Dividend allowance –nil rate
|Scottish starter tax rate (earnings up to £2,049)
|Scottish basic tax rate (earnings from £2,050 to £12,444)
|Scottish intermediate tax rate (earnings from £12,445 to £30,930)
|Scottish higher tax rate (earnings from £30,931 to £150,000)
|Scottish top tax rate
If you would like to talk more in more depth about tax planning for your own limited company please call or drop me an email.