Splitting your salary and dividends for optimum tax efficiency
If you have traded as a director of a limited company for a while then you will no doubt be familiar with the concept of setting up your “remuneration package” (i.e. the split between your salary and dividends) in the most tax efficient way. At Figurit we advise all our clients on this as protocol and we believe that it is essential to simple yet effective tax planning.
Using a limited company provides some options regarding how to draw money from the company; however the path is fairly clear cut, with a few considerations.
The benefits of adopting the correct split
To recap on the main reasons for effective structuring of salary and dividends:
- Income tax and National insurance (NI) for the director can be completely avoided
- The director’s state pension can still be credited at no extra cost
- By not taking excess dividends than those required to meet living costs, profits left in the company can be drawn as “capital” when the director sells their shares or closes the company. This is at a very low rate of 10%.
Salary and NI
You will want to pay yourself a director’s salary, firstly because your company receives tax relief at 20% for every £1 spent and secondly, in 2014/2015 a salary of up to £7,956 can be paid with absolutely no personal tax or National Insurance bill. The icing on the cake is that despite no NI bill, you will still gain state pension credit.
Your limited company does not get tax relief on the payment of dividends in the same way as the payment of a director’s salary.
As mentioned earlier, it is worth considering initially that by leaving the money in the company until sale or closure the low rate of 10% can be achieved when finally drawing out the funds. However, if dividends are required to meet your living costs then depending on how much will depend on the tax liability.
Deciding on the level of dividends can be tricky and it must factor in any income from other sources.
However, assuming that there is no additional income from other sources, dividends can be drawn up to £30,518 without resulting in any tax to pay.
Zero personal tax
In summary, a zero personal tax position can be achieved on a combined “salary and dividend package” with a net annual income for you of £38,474 (£7,956 + £30,518).
To take this a step further, a husband and wife (or unmarried partner) who are both directors and shareholders can take up to £38,474 each and pay no tax or NI.
Drawing further money
If further drawings are required to meet living costs then tax and NI will apply. This could be as high as 60.8%, depending on other income and circumstances.