Tax efficient directors remuneration strategy
One of the benefits of being a director and shareholder is taking directors remuneration from the company in the most tax efficient way to maximise your take home pay.
Key factors to consider are:
- Differences between salary and dividends
- Impact on overall tax payable
- Other personal factors such as benefit entitlement and pensions
What are the main differences between salary and dividends?
You can pay salary as an expense from the business. It is an allowable deduction in profit before corporation tax is calculated.
You can pay dividends from the company reserves (the net amount of profits, losses and dividends to date). In order to be payable the reserves need to be positive.
What tax do I need to take into consideration when devising a directors renumeration strategy?
After allowances, such as the personal allowance, the following initial rates of tax and national insurances apply for remuneration from April 2022 (after certain income levels the rates increase):
- HMRC taxes salaries, including bonuses, at 20% (plus 13.25% employee national insurance and 15.05% employer national insurance when at the basic rate of tax).
- Dividends are taxed at 8.75%, with the first £2,000 dividends being tax free when at the basic rate of tax.
- Corporation tax is currently at 19% on profits for the period after salary is deducted, but before any dividends are paid.
On the face of it, dividends appear the most attractive. However, there are other benefits and entitlements to consider.
Why is paying a salary important?
Paying a salary of some level is important in order to maximise some of the key entitlements below:
- Entitlement to state pension
- R&D tax relief claim (if the directors are involved in the research and development project, dividends are not considered in this calculation)
- Business asset disposal relief (previously entrepreneurs relief) when you come to potentially sell the business in the future
There is no corporation tax saving if you pay dividends as you may only pay dividends from profit after tax.
What other factors are there to consider?
If you have children, you may be claiming child benefit. Therefore, you’ll need to consider the high income child benefit charge. This is where the benefit can become repayable with a sliding scale for total remuneration over £50,000.
Pension contributions are another way of extracting money from the company. Like salary, they are an expense for the company and an allowable deduction for corporation tax purposes. However, you cannot access your pension funds until at least the age of 55.
Are there sufficient profits in the company reserves? If you do not know the current profit levels with up-to-date financials, you will be unable to confirm that you’ll be able to pay the dividends.
Is there a more tax efficient share structure with family members?
How can Wessex help with your directors remuneration package?
We advise on all aspects of profit extraction and 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.