Are you paying more tax than you need to?
What is a tax efficient salary and dividend?
If you are taking all or a large part of your money out as salary you are probably paying more tax and national insurance (NI) than you need to.
Many people in business won’t even give this much thought. They assume that as a director working through their own limited company they receive a salary – director’s remuneration.
You should get detailed, customised advice from your accountant on how best to structure your company. Depending on individual circumstances this may often involve gifting shares to your spouse. Commonly you would be best advised to take a low salary and the rest of the profits due to you as dividends. That’s not complicated with the right structure and advice.
If you have profits in your company and have not already used the tax free dividend allowance then depending on individual circumstances you ought to be receiving dividends and use up the £2,000 tax free allowance. If your spouse has shares the same applies to them too so you can double the relief. That applies each and every year.
Whether you are in retail, manufacturing or providing your own services under contract, you invoice through your company. So you have to extract the income from your company in a tax (and NI) efficient way. Nobody has to pay any more than the minimum due.
Our recommendation would be for you to draw a salary for the 2018/19 tax year at the rate of £660 per month. That is well below the annual personal tax allowance of £11,850 so there will not be any tax to pay.
More importantly it is below the NI primary threshold, which means you do not have to pay any NI. BUT, it is above the NI lower earnings limit (LEL). Therefore even though you are not making any NI contributions, because you are nevertheless taking a salary above the LEL your basic entitlement to state benefits are still protected.
There is no benefit to be gained by taking a higher salary and paying “a bit of tax and national insurance”. This would not increase your benefit entitlement. It will also not make any difference to the way HMRC regard you.
You can then take out the rest of the money due to you – your profits – as dividend.
Broadly, the first £2,000 of dividends you receive in a tax year are tax free. Above that the following rates apply:
| Basic rate | 7.5% |
| Higher rate | 32.5% |
| Additional rate | 38.1% |
That means for most taxpayers paying tax of just 7.5% instead of 20% PLUS NI on a salary.
This is not tax or NI avoidance. It is simple common sense and good basic tax planning.
Of course tax is not as simple as that and there are many permutations which is why we would always advise that you get specialist advice tailored to your own circumstances.
For further advice existing clients email us at support@anytime.uk.com or call 03333 110 230
For new enquiries contact us now
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