Do you know what you should be paying yourself this year?
They say that knowledge is power and when it comes to contractor remuneration strategies they are absolutely right. The problem is that knowledge often gets lost in the fluff and fancifulness of political posturing and endless rhetoric when new financial rules are delivered.
What a contractor should do with their salary each month (in plain English)
- The increase in the basic rate tax band: As of the new tax year (starting April 2017), the basic rate tax band is now £45k not £43k. This means that you should be doing the following with your remuneration each month:
- Increased National Insurance thresholds: this increase, which applies to the 17/18 tax year, means that you can now earn up to £8,164 per annum before you or your employer (i.e. your own Limited Company) need to pay any National Insurance contributions. A bit of good news!
- Recommended salary for 17/18: with the new National Insurance levels, the most tax efficient salary you can pay yourself for the 17/18 tax year is £680 per month. (Note: If you are one of our clients, it is important that you pay yourself this monthly salary on or after the 25th of each month as this is the date we process your payroll and make the relevant submissions to HMRC.)
- Recommended dividends for 17/18: if you require more than £680 per month to live on (who doesn’t right?) then you will need to top this up with dividends. So, assuming you have no other sources of personal income other than from your Limited Company, you will be able to pay yourself dividends of £36,840 during the 17/18 tax year (provided you have sufficient profits or reserves, of course). Anything over this amount, that you pay yourself will push you through the basic rate tax band and in to the higher rate tax bracket.
- In real terms this means £3,070 per month: If you are really smart, however, you should put £178.13 of this monthly dividend payment aside, each month, to cover the personal tax of £2,137.50 that will eventually be payable on that income.
- And if you need more than that: Then you need to know that for every £1k that you pay yourself in dividends above the £36,840 mentioned above you will attract an additional personal tax bill of £325 so make sure you save that too.
- And if you pay yourself over £100k in total: Then it gets really complicated so contact me and I’ll give you a bespoke answer.
I hope that has made everything crystal clear for you, but if you still have questions, please just call one of the team and we will tell you, in plain English, exactly what you need to do.
A final word on clear communication
I write this as an accountant, and I am slightly hesitant to apply such a broad brush across the faces of my peers, but I know that most accountants do tend to make the simple complicated. As the owner of Meades Contractors, I have banned ‘accountant speak’ and useless jargon.
If you know us at all then you will also know that we strive to break the mould, question the rules and conduct ourselves like professional friends who care enough to tell you straight, honest and in language that is effective. If that sounds like an accountant you’d like to do business with, then get in touch.