With much fanfare, the personal allowance from 6 April 2013 was increased to £9,440. This means for the average employee, they will pay 0% tax on earnings up to £9,440.
However, if you are a director of a limited company, this figure doesn’t mean much since the optimal way to pay yourself as a company director (for the year ended 5 April 2014) is:
Dividends (net) £30,379
If you pay this every year, you will pay no income tax (as long as you don’t have earnings from other sources). This is one of the major benefits of running a business through a limited company you pay much less tax than an employee.
At this level you are paying 0% income tax and 20% corporation tax. Whereas an employee is paying 32%.
You may notice that this is a lower amount than last year and you would be correct. Since with one hand they have upped the 0% band, with the other hand they have increased the higher rate band (the band where you pay 25% tax on your dividends).
So be careful when you are paying yourself from your limited company that you don’t go over this figure.
If you can take out more, make sure it is planned correctly so you don’t pay the income tax.
However, please remember do not think that you want to earn less to save tax. Yes, if your accountant can reduce your profits through cost adjustments and year end planning to then save tax – that’s fine. But don’t think that you actually want to earn less profits to save tax, you always should be trying to earn more because even the highest tax rate (45%) you are left with money in your pocket.