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PSCs, are you ready for £3,000 less in dividend allowance?
It might date back to an announcement almost three years ago, but a change to dividend taxation will hit PSC contractors – in earnest – from next month, In fact, from 6th April 2018, there are significant changes to the tax-free dividends allowance. These changes will reduce the 2017/18 tax-free rate from £5,000 to £2,000 — per tax year, in 2018/19.
Tax Free Dividend Allowance £2,000
Personal Allowance £11,850 (up from £11,500)
Basic Rate (7.50%) Total income up from £46,350
Higher Rate (32.50%) Total Income between £46,351 & £150,000
Additional Rate (38.10%) Total Income Over £150,000
From the 6th April these tax bands and rates come into force.
Impact on Take-Home Pay – an example
Contractor Dan works 200 days in the 2017/18 tax year, and the same again in the 2018/19 tax year.
We look at Dan’s take-home pay via the route of a minimal salary and withdrawing all available dividends.
Dan’s circumstances are as follows:
- He has a limited company, Dan IT Ltd, in its first year of trading
- Dan IT Ltd invoices his client £80,000+VAT
- Dan IT Ltd is on the VAT Flat Rate Scheme as a ‘limited cost’ trader, with his 1% discount in his first year of trade (15.5%).
Dan IT Ltd’s gross income is £81,120 (£80,000 + £1,120 VAT flat rate saving).
- £8,160.00 is paid to Dan as a gross salary (also net salary)
- £10,000 is incurred for expenses
- Corporation tax is payable by Dan IT Ltd at 19% (£11,962.40)
- This leaves £50,997.60 paid to Dan as dividends
Dan’s personal tax due on his salary and dividends amounts to £6,738.52 (based on 2017/18 tax rates).
Therefore, Dan’s take-home after Tax and NI is £52,419.08 (salary and dividends after tax).
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