At this time of year owner managers of limited companies “what is the most tax efficient split of salary and dividend in the new tax year?”
Provided your company is not caught under the IR35 rules (your accountant will have told you if you do), from 6 April, 2015 the tax factors to consider are as follow for the 2015/16 tax year:
- You have a tax free personal allowance (if you are allowed it all) of £10,600 (£883.33 per month);
- As a director, you start paying Employees’ National Insurance when your salary reaches £8,060;
- Although Employers’ National Insurance is payable when, as a director, your salary reaches £8,112. Since April, 2014 businesses have been able to take advantage of the Employment Allowance meaning no Employers’ National Insurance is payable to HMRC until it reaches £2,000;
- Level of company retained profits after tax that a dividend can be paid out of;
- Who else has shares in the business;
- If you have set up your business during the tax year and received salary from another company in the year then you need to speak to your accountant as my calculations will not apply to you as they are;
- Consideration needs to be taken of any pension contributions you want to make;
- Any redundancy payments you want if your company ‘closes down’ or is sold and you are made redundant;
- Similarly, some unemployment and state benefits are based on your salary (i.e. higher benefit if your salary was higher)
If the only consideration is the most tax efficient remuneration from the company and you will not be wanting more than £100,000 in total, a tax efficient salary/dividend split would be:
Salary £10,600 PA (£883.33 per month)
This salary level would result in Employees’ National Insurance being deducted of £304.80 PA (£25.40 per month). The good news is that the additional tax relief the Company gets on the part of the salary above the National Insurance threshold of £8,060 is £508.00 PA (£42.33 per month) resulting in £203.20 less tax to pay each year after the National Insurance paid is taken off.
The balance of remuneration can be paid as dividend (subject to the retained profits after tax of the company).
The first £31,785 of dividend above the £10,600 salary would attract no additional tax on the director/shareholder as total income reaches £42,385 which is the 40% higher rate band threshold.
Any dividend you pay yourself above the £31,785 is subject to additional tax. The tax you pay on it is 25% of the net dividend providing it does not exceed £150,000 (basically you need to put away £250 for each £1,000 of dividend to cover the tax).
Any dividend you pay yourself above the £150,000 is subject to additional rate tax. The tax you pay on it is 30.556% of the net dividend (basically you need to put away £305.56 for each £1,000 of dividend to cover the tax).
This is a general summary of the tax efficient remuneration for owner managers of limited companies. It is essential to speak to your accountant before acting on the above as everyones circumstances are different and there may be other factors to consider.