It is important that shareholders/directors have regular reviews of their salary and dividend mix to ensure they are receiving the greatest benefit. There are several key factors to note covering NIC, Income Tax and Dividends:
National Insurance Contributions:
- The £3,000 employment allowance continues to be available to set against the employer’s national insurance contribution (NIC) liability. Alternatively, this allowance may be set against the employers NIC on director’s salaries if unused.
- Where the only employees are husband and wife there would generally be no PAYE or employers NIC on a salary up to the £12,500 personal allowance.
- There would however still be employees NIC at 12% on the excess over £8,632 (£166 per week) which would be £464 on a £12,500 salary, leaving £12,036 net.
Dividends and Income Tax:
- Where dividends fall within the basic rate band of £37,500, the rate continues to be 7.5% beyond the £2,000 dividend allowance. Husband and wife each pay £2,663 tax on dividends of £37,500 assuming they have no income other than a £12,500 salary, leaving £34,837 net of tax.
- A combination of £12,500 salary and £37,500 in dividends would result in £46,873 (93.7%) net of income tax and NICs.
Companies Act
The Companies Act requires that companies may only pay dividends out of distributable profits. This means that in the absence of brought forward reserves the company would need to:
- Provide for 19% corporation tax in order to pay the dividends
- Have profits of £92,593 in order to pay dividends of £75,000 (after providing corporation tax of £17,593).
Overall the combination of salary and dividends suggested above would result in net of tax take home cash of £93,746 for the couple out of profits before salaries and corporation tax of £117,593 (20.3% overall tax). This still compares very favourably with the amount of tax and NIC payable if the couple were trading as a partnership.
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