For some individuals it makes sense to operate as Limited Company especially considering the recent announcement that Class 4 National Insurance is rising. Saving tax should not be the only consideration when deciding on operating as a limited company, there are many different factors to consider.
Director/shareholders of a limited company are traditionally remunerated by receiving a small salary up to the national insurance primary threshold and the payment of dividends.
Dividends received by an individual are subject to special tax rates. The first £5,000 of dividends are charged to tax at 0% – this is called the dividend allowance. Dividends received above the allowance are taxed at the following rates:
- 7.5% for basic rate taxpayers
- 32.5% for higher rate taxpayers
- 38.1% for additional rate taxpayers
Dividends within the allowance still count towards an individual’s basic or higher rate band and so may affect the rate of tax paid on dividends above the £5,000 allowance. To determine which tax band dividends fall into, dividends are treated as the last type of income to be taxed.
From April 2018, the Chancellor announced that the dividend allowance will be reduced from £5,000 to £2,000 and the government expect that 80% of general investors will still pay no tax on dividends.
The reduction will affect Director/shareholders of family companies who take dividends in excess of the £2,000 limit. The cost of the restriction to the dividend allowance will be £225 for basic rate taxpayers, £975 for higher rate taxpayers and £1,143 for additional rate taxpayers.