For those trading through a limited company, your current remuneration package may be a small NI level salary with the balance of your remuneration from your company being received via dividends.
The small level salary provides you with a qualifying year for state pension but is set at a level that there is no national insurance for the employee or employer. It also makes use of the majority of your personal allowance. The monthly salary figure is currently £702.
For 2018/19 and going forwards into 2019/20 shareholders can receive the first £2,000 of dividend income tax-free.
Generally, it is still more tax efficient to receive a low-level salary and dividends from your company than receiving the same net cash through the payroll. The lower salary saves the cost of the employer’s NI for the company, as well as employees’ NI and tax for the employee. The dividend tax rate of 7.5% in the basic rate band is much lower than the current 19% tax rate for salary received above your personal allowance.
If you have a director’s loan account with your company and the company owes you a reasonable amount throughout the course of the year, the company can pay you interest on the loan. This needs to be at a reasonable market interest rate. As a basic rate taxpayer, you can receive £1,000 of interest and pay no tax on this; this is reduced to £500 if you are a higher rate taxpayer. The interest charge in the company will also be a tax-deductible expense for corporation tax. The company will have to pay the interest to you net of 20% income tax, but this will be recovered when you complete your tax return. The company will also need to complete form CT61 and pay the tax deducted over to HMRC.
It is important to give consideration to your pension requirements when setting your remuneration package. Employer pension contributions can be made where capacity to make employee pension contributions is limited. However, careful consideration of your remuneration levels and your individual maximum capacity to make contributions in the tax year, as well as the total value of your scheme, is very important to avoid charges.
It is important to review your remuneration strategy regularly, and well, before each tax and accounting year end. We will be able to assist you, in conjunction with our financial planning team where appropriate, to plan your strategy to minimise the tax burden on you, your business and your family. There is no one size fits all solution and we will help to develop a remuneration package which is tailored to your personal, family and business needs.
Please do get in touch if you would like to discuss this in more detail.