Firstly, the personal allowance has increased to £12,500 for 2019-20, which means the first £12,500 of income will be completely tax free.
However please note that if your total income exceeds £100,000 in this tax year then for each £1 you earn above £100,000 limit you will lose 50pence of Personal Allowance. This means that you will lose all your personal allowance if you earn over £125,000 for 2019-20.
The income tax rates are as follows –
Starting from £12,501 to £50,000 at a basic rate of 20% and from £50,001 to £150,000 taxed at a higher rate of 40% and then income above £150,001 will be taxed at an additional rate of 45%
Class 1 Employee (Primary) contribution rates are –
Typically on salary income from £8,633 to £50,000 at 12% and then 2% on income above £50,000
Class 1 Employer (secondary) contribution rates are –
Typically on salary income from £8,633 onwards at 13.8%
Please note that there are no NICs payable on dividend income.
Dividends are taxed at a different rates as follows –
Similar to 2018-19, the dividend tax free allowance continues to be £2,000 for 2019-20, which means the first £2,000 of dividend income will be tax free, even if you are a higher rate tax payer i.e income above £50k.
Apart from £2,000 tax free dividend, any more dividend income up to the basic rate band i.e £50,000 will be taxed at basic rate level at 7.5% and a higher rate of 32.5% on dividend income between £50,001 and £150,000 and then additional rate of 38.1% on dividend income above £150,000
Our recommended level of salary and dividends for tax year 2019-20
If you are planning to be within the basic rate tax bracket then you need to make sure your total income does not exceed £50,000 per annum. Hence, we recommend a salary of £700 per month i.e £8,400 per annum on which you don’t need to pay any PAYE Tax or NICs, and you can take dividends of up to £41,600. The basic rate dividend tax on this level dividend would come around £2,662 for the whole tax year. This will become payable by 31 January 2021 via self-assessment tax return. Please note that you may also have to make advance tax payments called payments on account towards your 2020-21 tax.
IMPORTANT – If you have rental income then any rental profits you make during the tax year will also be added to your total income. Rental profits may push your total income into the higher rate threshold, which means you would end up paying higher rate tax at 40% on rental profits. Therefore careful consideration is needed here. If you have rental profits then plan your dividends accordingly and also maintain a monthly or quarterly rental profit calculation. This should give an heads-up on where your total income would be heading towards at the end of the tax year.
Any questions on the above article, Please feel free to contact Mano Gajendran via email@example.com