What should I pay myself from my limited company in 2016/17? - Are dividends the wrong way now for owner managers?

 

With the recent changes in the rules from 6 April 2016 surrounding the introduction of the dividend tax charge, payment of dividends gross, no tax credits and the £5,000 dividend allowance, a question that owners of limited companies are asking is “how is the best way to pay myself in 2016/17?”

 

In recent years it is widely accepted that in most cases the most tax efficient way to pay yourself from your owner-managed company is to receive a salary up to the National Insurance Primary Threshold, and receive the balance as dividends (assuming the company has sufficient reserves to pay the dividends).

 

So will this change as we move into 2016/17?  We have looked at 3 different scenarios that could be adopted to attain an average net monthly income of £5,000, to see what the real cost of this will be.  (For information, the cost of scenario 1 would have been £5,262 in 2015/16, and all examples assume no other income is received in the year).

 

Scenario 1 – take a salary up to the NI Primary Threshold (£8,064) and the balance of £51,936 as dividends (remembering that the dividends are no longer “grossed up”)

 

Scenario 2 – take the £5,000 “tax free” dividend, and receive the rest as salary.

 

Scenario 3 – take a moderate salary of £20,000 and receive the rest as dividends.

 

Our detailed example is shown by clicking on this link, but the results show a not dis-similar pattern to what has generally proved the case in recent years. 

Kind regards

Alison Headey

(ah@obcaccountants.com)

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