If you operate your own UK limited company you will probably want to use the tax planning strategy of extracting money from your company through a combination of dividends and a low salary to ensure you optimise your tax.
For the 2019/2020 tax year the personal allowance is £12,500 – this means your first £12,500 of income is tax free.
If your only income was your salary then any additional salary above £12,500 would be taxed at 20%, and then once you hit the higher tax band of £50,000 any additional salary would be taxed at 40%.
There are further thresholds and tax issues to be aware of but we’ll keep it simple for this article.
With regards to dividend income, the tax free dividend allowance for 2019/2020 is £2,000.
For the 2018/19 tax year, the tax on dividends is calculated as follows:
Over and above £2,000 the dividend income is taxed as follows:
It might help to look at a very simple example – if your only income was dividend income – you could receive £14,500 of tax free dividend income in 2019/2020. This is due to both your £12,500 personal allowance and also the £2,000 dividend allowance.