Let’s look at different director/shareholder salary and dividend mix and see what you would be left with after tax.
The truth is, it will be less than last year due to the changes to the tax on dividends and Employment Allowance but what we want is to be left with as much as possible after the new rules come into force after 6 April, 2016.
Let’s assume you want to have a gross income up to the 40{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214} higher rate band and you are a sole director/shareholder with no other employees (typical of many consultants and freelancers):
Option One (annual salary to NI threshold)
Gross salary £8,060 (no NI or tax to pay)
Dividends £7,940 (£5,000 plus balance of personal allowance tax free)
Dividends £27,000 (taxed at 7.5{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214})
Total gross income £43,000
Less tax on £27,000 of dividends at 7.5{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214} = £2,025
What you are left with is £40,975
Company gets 20{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214} tax relief on £8,060 salary = £1,612
Overall net remuneration and tax saved by the company is £42,587
Option Two (salary to tax threshold)
Gross salary £11,000 (no tax to pay)
Dividends £5,000 (tax free)
Dividends £27,000 (taxed at 7.5{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214})
Total gross income £43,000
Less tax on £27,000 of dividends at 7.5{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214} = £2,025
less employees NI at 12{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214} on £2,940 = £353
What you are left with £40,622
If you cannot claim the Employment Allowance then the company has to pay 13.8{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214} Employers NI on £2,888 = £398.54
Company gets 20{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214} tax relief on £11,000 salary plus the £399 Employers NI = £2,280
Overall net remuneration and tax saved (after deducting Employers NI) by the company is £42,503
Option One is marginally better and benefits from less administration paying National Insurance Contributions to HMRC.
If, however, you have other employees and qualify for the Employment allowance, then Option Two is marginally better as the company will not have to pay Employers NI contributions.
Option One is likely to be more beneficial for many consultants and freelancers who only employ themselves as directors.
Again, another affect would be if you have other employees that use up the Employment Allowance and then option one is better again.
Remember: Please get advice from your accountant or payroll bureau before taking action on the above