Salary and Dividends from Personal Companies

The advent of a new tax year always highlights various planning issues which may be appropriate for certain individuals and it is often an opportune moment to review one’s tax affairs generally and to take any suitable action in light of changes to various tax thresholds etc.

One of the key action points at this time of year for the directors of owner managed companies is to consider the level of income that they extract from their limited companies in the forthcoming tax year in order to be as efficient as possible from an Income Tax and National Insurance (NI) point of view.

It has been common practice for a while now for directors/shareholders of ‘one-man companies’ (or even companies that are owned and managed by more than one individual e.g. husband and wife companies) to pay themselves a salary sufficient to gain a ‘credit’ for their NI contribution record and top up their income with dividends from the company.

This type of tax planning, although not ground-breaking, continues to prove beneficial for a lot of business owners who operate through the medium of limited companies.

What is the position for 2015/16?

To maintain one’s NI contribution record for 2015/16, a salary of at least £486 per month should be paid (that being the ‘Lower Earnings Limit’ for NI purposes) but it is usually better to pay more than that, £672 per month, since any salary up to that level does not incur any NI costs but still contributes to your NI record for state pension and other benefits purposes.

Any salary paid above this level will attract NI contributions that will be payable to HM Revenue & Customs.  Employee’s NI is payable at 12% on earnings above £672 per month (with a further 2% payable for higher-earners) and Employer’s NI is payable at 13.8% on earnings above £676 per month.

Company directors can therefore pay themselves a salary of £8,064 for 2015/16 without incurring any Income Tax or NI liabilities.  They could then pay themselves net dividends from their company of just under £30,900 to top-up their income and at that level (more or less up to the higher-rate tax bracket) should not suffer any Income Tax or NI thereon.

What about my 2015/16 Personal Allowance?

For Income Tax purposes, most individuals can have taxable income of up to £10,600 in 2015/16 without suffering any Income Tax.

By paying the ‘minimum’ salary and topping up with dividends as mentioned above, an element of the Personal Allowance is unused.  Therefore one may want to consider paying a higher salary to fully utilise their Personal Allowance and incur some NI costs.

This approach has been more attractive for the last year or so, due to the introduction of the £2,000 NI Employment Allowance (which I wrote about around this time last year).  This means that, even though an annual salary of say £10,600 will incur some Employee’s NI at 12%, any Employer’s NI should be fully covered by the Employment Allowance and with the additional Corporation Tax relief that should be available to the company on the higher salary, overall the company and the director will be better off from a tax and NI point of view.

What else should I consider?

Each individual’s circumstances will be different and you need to consider your income requirements in detail and any other types of taxable income that you may receive in the tax year.  For example, if you own a property which you rent out, income from that will usually be taxable and you may then want to pay the minimum salary from your company to gain an NI credit (as mentioned above) to leave some of your Personal Allowance to set against rental income.

The ability to pay dividends from your company will also be dictated by the company’s profitability as, amongst other things, it must have sufficient distributable profits (after Corporation Tax) from which to pay dividends.

Finally, there are various other ‘non-tax’ matters that you should consider.  For example, if you have any policies such as permanent health insurance, you may find that the benefits payments are linked to salary only and do not include dividends. 

In those circumstances you may need to consider increasing the salary and incurring some NI costs.

If you wish to discuss your individual circumstances in detail then we would be pleased to hear from you.

The above is for general guidance only and no action should be taken without obtaining specific advice