I am an IT contractor working through my own limited company and I am the sole director and shareholder. I want to extract the optimum level of salary and dividends for the 2017/18 tax year but my situation is a little more complicated because I will have rental income profits of approximately £5,000 for the year and I also make charitable gift aid contributions of £150 per month. Can you recommend what the optimum level of salary and dividends is?

 

 

Answer, Nov 2017

Salary & Dividends

When it comes to the optimum level of salary and dividends for the 17-18 tax year we are assuming you mean that you want to limit your personal income to the basic tax band of £45,000 – we have an article below that goes through the optimum level of salaries and dividends if you want to dive into the detail:

Optimum Salary & Dividends 2017-18

However to keep things simple for this article, the typical optimum salary and dividend mix for 17-18 is:

  • Salary £680 per month, £8,160 for the year
  • Dividends £3,070 per month, £36,840 for the year

We’re going to assume that you are not caught inside of IR35.

We then need to work through the additional complexities for the question at hand.

Your salary should remain at the advised level of £8,160 as this will protect your national insurance position, so we just need to work out the best level of dividends.

 

Rental income

The rental income will be taxed before dividends (dividends are taxed last). Assuming that the rental profits of £5,000 are all yours (i.e. the property is not in joint names), then if we add the £5,000 to the optimum salary of £8,160, this totals £13,160.

The leaves headroom of £31,840 (£45,000 less £13,160).

If it wasn’t for the charitable gift aid contributions, this would be the optimum level of dividends to extract, but we need to consider the impact of these charitable contributions which is discussed next.

 

Gift aid

We have written a previous article about how gift aid works – from your personal tax perspective your basic tax band will increase by the ‘grossed up’ amount of the total gift aid contributions.

As you give £150 per month, which is £1,800 for a full year – we gross this up by doing £1,800 divided by 0.8 which equals £2,250.

The standard higher tax band for 17-18 is £45,000 but with the gift aid adjustment this increases to £47,250 in this example.

 

Optimum dividends

Therefore the optimum amount of dividends in this example will be £34,090:

£47,250 higher tax band, less £5,000 rental profit, less £8,160 salary = £34,090 of dividends

This assumes you have sufficient profits in the business to support this level of dividends.

The personal income tax will total £2,514 which is calculated as below:

 

Salary & Dividends 17-18 - Case Study IT Contractor