You can optimise ‘take-home’ pay for director/shareholders by getting the right balance between salary and dividends. Here are three things to consider in a tax efficient directors remuneration strategy:
- Balance between salary and dividends
- Impact on corporation tax for the company
- Other personal factors such as benefit entitlement and pensions.
Why pay salary as part of directors remuneration?
You should pay sufficient salary to protect your entitlement to state pension and other contribution-based benefits. This will also allow you to make pension contributions.
It’s important that, where a director is an employee, you follow the National Minimum Wage rules.
What are dividends?
Dividends can be paid to shareholders where there are sufficient company profits.
The first £2,000 of dividends received are tax free. After that, HMRC tax dividends at 7.5 % for basic rate tax payers and 32.5% for higher rate tax payers.
What is the impact on corporation tax?
Income taken as salary (or a bonus or pension contributions) is an allowable deduction for corporation tax purposes. This means the company pays less tax on profits. Currently, your company will pay 19% tax on profits.
There is no corporation tax saving if you pay dividends. That’s because you may only pay dividends from profit after tax.
What is the effect on the company’s R&D tax relief claim?
Are your directors spending time on research and development work? If so, only the director’s salary is taken into account in the R&D the claim. The claim excludes any dividends paid to the director.
Therefore you should consider the amount of any potential R&D claim, the directors remuneration and directors time spent on R&D.
Other factors to consider?
For directors with children, consider whether the High Income Child Benefit charge will apply. Remuneration should be below £50,000 each year to avoid the charge completely. More details on this scheme can be found here.
You can claim marriage allowance where the director is married or in a civil partnership and one partner is a basic rate tax payer and the other earns below the personal allowance. A tax saving of up to £250 per year could be available. Find out more here.
Finally, the company can make personal pension contributions on behalf of the director/shareholder of up to £40,000 in each tax year. Like salary, pension payments are an allowable deduction for corporation tax purposes. However pension funds will be ‘locked away’ until at least the age of 55.
How can Wessex help with your directors remuneration package?
We advise on all aspects of profit extraction. We work closely with all our clients on personal and company tax matters to advise on the best remuneration strategy for individual circumstances.
Please get in touch with the team at Wessex to discuss your requirements.