Information is being released daily from the Government and other sources on what support is becoming available for businesses and individuals during the Covid-19 crisis. In this article we consider how to take a tax efficient salary from your company during covid-19.
We are updating our website with the latest guidance on a regular basis.
You may still be looking ahead and considering how much salary to draw from your company throughout the 2020/21 tax year. As in prior years the most tax efficient way to do this is still to draw a small salary and to take the remainder mainly in dividends. There are however likely to be further considerations, especially at the beginning part of the tax year, should you be looking to claim through the Coronavirus Job Retention Scheme (“CJRS”). Any claim from the Government will be limited to 80% of your salary drawn as of 28 February 2020, rather than what is drawn from April onwards.
Unlike prior years, to calculate the size of the most efficient salary you will need to consider whether your company is entitled to the Employment Allowance (“EA”) which reduces a business’s liability to employer’s National Insurance (“NI”). The change is because for the first time since 2017, the thresholds for paying employer’s NI and employee’s NI are no longer aligned.
Set out below are the most efficient ways¹ to draw from your company in 2020/21, depending on whether or not the EA is available². The amounts shown reflect the biggest tax savings when considering both the income in your hands and the cost to your company of paying it, ignoring any amounts that may be received under the CJRS.
Assuming the EA is available, the revised salary rate from 6 April 2020 will be £1,041 (£12,500 per annum)
Assuming the EA is available but is utilised in full against employer’s NI due on other staff wages, the revised
Assuming the EA is available but is utilised in full against employer’s NI due on other staff wages, the revised salary rate from 6 April 2020 will be £791 (£9,500 per annum)
The overall tax saving to you and your business in this third scenario is £55³, after taking into account the payment required of £98 to HM Revenue & Customs for the employer’s NI. You may however prefer to pay a reduced salary of £732 (£8,788 per annum) should you not want to deal with the employer’s NI and benefit from an administrative saving.
OTHER WAYS TO DRAW MONEY
As well as taking salary and dividends, it may be possible to take further money from your company where you have a loan account in credit. You could consider paying yourself a market rate of interest on your loan balance. A basic rate tax payer is able to achieve £1,000 of interest tax free, although this amount is reduced to £500 for a higher rate tax payer and fully withdrawn for those earning above £150K. There is however a reporting requirement for companies paying interest.
Subject to potential capital gains tax implications, paying rent can also be NI efficient.
Please let us know if you require any help with or would like to discuss either of these options further.
POTENTIAL IMPACT OF A LOW REMUNERATION STRATEGY
Whilst highly efficient from both an income tax and NI cost perspective, there are other non-tax aspects that you should be aware of when considering a low
salary topped up by dividends:
If you are a member of an employer funded (multiple of salary type) “Deathin- Service” or “Group Critical Illness” scheme the level of life cover benefit
may reduce in line with your lower salary.
If you or your business operates an Income Protection Insurance policy, the level of benefit payable in the event of a claim may be restricted by the
relevant insurance company provider.
If you pay pension contributions personally, the maximum amount you can pay each year will be limited to 100% of your reduced “earnings”, albeit
you can contribute a minimum of £3,600 per annum regardless of salary levels, plus contributions may be made via your company on your behalf, if
appropriate.
If you choose to take a low salary from your company, this may impact on the amount of state retirement pension and other state benefits that you will
be eligible for.
Over the years mortgage and loan providers have made it increasingly challenging for homebuyers to get mortgages or to re-mortgage or to raise
finance. This might be an issue if you have only recently incorporated or plan to obtain further lending in the near future.
A number of the non-tax consequences can be mitigated and much depends on whether certain financial institutions take “dividend income” into account.
If you are concerned about any of these consequences, it is recommended that you seek further advice on how to take a tax efficient salary from your company and we would be happy to recommend you to a member of our
Financial Planning team, if required.