It is a long established practice that small businesses who are structured as a Limited Company pay themselves a small salary and dividends as a tax saving measure.
However in the run up to this tax year there have been multiple legislative changes that have affected the most tax efficient way of doing this. So all small Limited Companies should be reviewing their remuneration strategy with their accountant to check that it is still the best way forward.
- The abolition of the Employer’s Allowance for one Director Companies has actually simplified the issues around what is the best salary to take.
- There is no point in paying additional National Insurance in order to save a smaller amount of tax.
- Therefore in the majority of cases small business owners should be paying themselves a salary of £8,060 a year.
- The advantages of this are:
- No National Insurance,
- A year’s credit toward the State Pension (now need 35 years)
- The new Dividend Tax complicates the picture
- The dividend tax credit has been abolished
- Any dividends over £5,000 will incur the additional 7.5% dividend tax rate
- The personal allowance is £11,000 this year so any income over £16,000 will incur tax
- So if you take £43,000 of income there will be £27,000 * 7.5% = £2,025 of income tax due
- Any dividend income over this will incur a rate of 32.5%
So as you can see those owners who were used to paying Corporation Tax and then not having a personal tax bill if they were basic rate taxpayers are going to be in for a shock come January 2018 when they have their first additional tax bill.
There are a number of ways of mitigating this new tax including transferring shares to your spouse, Company Pension contributions and employing members of your family where they are actually doing proper work for your business.
Give us a call if you would like a review of your remuneration strategy.