A new tax year brings with it new challenges for directors of family companies as they consider how best to make tax efficiencies when it comes to paying themselves. Read on for things to consider when extracting profit from your family business.
Paying a salary
Traditionally, accountants and tax advisors have suggested that director and shareholders should extract profit by paying themselves as low a salary as possible, making the rest of their income up through dividend payments.
This has been because dividend payments are usually exempt from National Insurance Contributions (NICs). Recent changes in legislation mean that the starting point for paying NICs has risen to £162 a week – somewhat lower than the £11,850 personal income tax threshold. So, a salary just below £162 a week - or £8,424 a year - would mean no NIC would be due but would be sufficient to count as a qualifying year for State Pension purposes if it was above the £6,032 lower earnings limit.
One vital thing to remember is that employers can claim a £3,000 employment allowance to be set against employers’ NICs if the director of that company is not the only employee. If this has not been used against NICs on staff wages then you should consider increasing the directors’ salaries up to £11,850, as the additional salary would save corporation tax at 19% on the £3,426 extra salary, which equals £651, whereas the employees NIC would be £411.
Tax rate changes on dividends
When it comes to dividends, the rate of tax changes from 7.5% to 32.5% at a total income of £46,350. With this in mind, the dividends should not exceed £34,500 if a salary of £11,850 is paid. The first £2,000 would be taxed at 0% with £32,500 being taxed at 7.5%. Don’t forget that this tax for the tax year to 5 April 2019 will then be due on 31 January 2020.
Running a family company brings with it many rewards – as well as many challenges. Other profit extractions such as spouses and children’s wages - which have to justified as being at market rate - or pension contributions are also possible.
We can talk you through the different options to make the best plans for your family business
If any of the above is causing you concern, or you simply don’t have time to do the calculations yourself, get in touch with our highly experienced tax team on 0115 964 8888 or email email@example.com today for a confidential chat that could start making your money go further.
The views provided in this article are for general information purposes only. Nothing in this article represents advice of any nature whatsoever. Accordingly, RWB CA Limited does not accept any liability or responsibility for the information contained in this article or any decision or other action that may be taken in reliance upon the information contained within it. RWB CA Limited accepts no responsibility for any errors of fact or opinion and assumes no obligation to provide you with any changes to its assumptions.