Why does this need planning – what options are there?
Companies generally pay their employees a salary, perhaps with reward elements such as performance related bonuses, but basically remuneration is paid through the payroll and under deduction of PAYE.
But for the owner of a company there is more than one option for the method of remuneration, because a shareholder can take a dividend as owner, or salary as a director/employee, and there are other rewards that can be thrown into the mix such as pension contributions or benefits in kind, such as company cars.
And the make up of the remuneration package needs to be kept under review because the tax and pension rules are constantly changing.
What has changed?
For many years there was a significant advantage in taking dividends rather than a salary, basically because this avoids national insurance for both the employee and the employer – the savings could add up to several thousand pounds each year.
Unfortunately, the government has now tackled the disparity between the dividend and salary options and since April 2016 we have had an extra 7.5% added to the dividend taxation rates. This hasn’t quite created a level playing field – dividends are still more tax efficient than salaries (because of those NI costs) but the gap has been closed somewhat.
However, now that corporation tax rates are edging down to 17%, the increased costs of dividends will be mitigated slightly.
So, what’s the best strategy?
A very common, tax efficient, remuneration strategy is to take just a small salary to maintain a national insurance record for state pension purposes, so that’s a salary up to the NI threshold, a little over eight thousand pounds. Then the rest of the remuneration is taken as dividends, perhaps aiming for enough dividends to use the basic rate band, so as to keep the tax rate as low as possible – it depends on your income requirements.
The salary figure could possibly be pushed up to the personal allowance, if circumstances allow you to take advantage of the employment allowance which will mitigate some of the national insurance costs.
Are there other elements to the best remuneration mix?
The other main factor to throw into the mix is pension contributions. There have been successive changes which have limited the extent to which advantage can be taken of pension contributions but it still makes sense to use the opportunities that remain. If an individual is on a dividend remuneration strategy, it will probably be a matter of using employer contributions rather than personal ones.
What else should be taken into account?
There are a few areas to be mindful of:
Employment intermediary rules – for some there is legislation that prevents the use of a dividend based remuneration strategy.
Company cars – usually tax expensive. Have a close look at the tax effect before you throw them into the remuneration mix.
Remuneration or dividends for your spouse – can be very tax effective but, again care is needed. Salaries need to be actually earned and dividends directed to a person’s other half could fall foul of anti-avoidance rules.
At the end of the day take advice to achieve a tax effective remuneration mix and then keep it under review.
If you’d like to discuss your particular circumstances, please get in touch with Charles Green on 020 8652 2450 or email firstname.lastname@example.org