If you’re a business owner or director, getting your salary structure right is crucial.

A solid and adaptable plan can help to save you and your business from paying more tax than necessary and ensure that you get the most out of being a business owner!

There are a number of tools in your arsenal for optimising your remuneration strategy, starting with your salary and dividend payments.

Remuneration structuring

Many limited company business owners choose to extract profit from their business tax efficiently via a combination of:

• Salary – Typically set at or around the Personal Allowance of £12,570 to minimise Income Tax and National Insurance Contributions (NICs).
• Dividends – Paid to owner/director-shareholders where there is sufficient profit to pay them, and not subject to NICs.
• Pension contributions – You can claim tax relief on private pension contributions of up to 100 per cent of your yearly earnings.
• Director’s loans – You or a close family member receives money from your company, which may be tax-free for you as an individual, depending on how it is repaid.
• Benefits – Payroll benefits such as subscriptions or a company car, which may still be subject to tax based on their value to you, but at a lower rate than your income.

However, dividends and salary are likely to form the backbone of any business owner’s income strategy if they’re a stakeholder in a limited company.

This provides stability and an incentive to succeed, but it’s important to take a look at the tax implications of any remuneration option you take.

Dividends vs salary

Most business owners or directors receive a salary of some kind to use their tax-free Personal Allowance of £12,570.

Beyond that, the choice between dividends and salary comes into play.

Some business owners choose to take all of their income as salary, which can push them into the Higher or Additional rate tax band.

However, a potentially more tax-efficient way of receiving your income is to take your base salary up to your Personal Allowance and take the rest of your income as dividends. This can carry a number of benefits, including:

• A lower tax rate – Dividends are taxed at a much lower rate than salary, particularly if you stay within the Basic rate band, which attracts a dividend tax rate of 8.75 per cent.
• No National Insurance (NI) – You don’t have to pay NI contributions on dividend payments.

You also receive a £500 tax-free dividend allowance in addition to your Personal Allowance each tax year.

The question of corporate taxes

If you’re a business owner, then you’ll need to consider the tax implications of your income for your business as well as yourself.

For limited companies, this means accounting for Corporation Tax.

For example, consider a remuneration strategy incorporating salary, dividends and a company car.

Salary is classed as an expense of running your business and is therefore deductible when calculating your taxable profits, but dividends, on the other hand, are not. Company cars are generally eligible for capital allowances for limited companies.

However, dividend payments aren’t subject to NI. Salaries and company cars, on the other hand, will be subject to Class 1 employer NI contributions.

It is therefore a case of balancing different methods of remuneration to minimise not only personal taxes but corporate ones as well, whether that’s Corporation Tax or Class 1 NI contributions.

As with your personal taxes, it is overall likely to be most tax-efficient for your business to use a combination of salary and dividends, perhaps also incorporating benefits that are subject to capital allowances.

For advice on managing profit extraction, salary and dividends, please contact our team today.