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Remuneration planning for business owners


January 2024 saw the reduction of National Insurance for employees. This has continued the recurring trend in the policy of recent years of closing the gap between the taxation of dividends and salary. But how does this affect remuneration planning for business owners?

From 6 January the rate of National Insurance paid by employees on their earnings between £12,570 and £50,270 has reduced to 10%. The rate paid by their employers has, however, remained unchanged. This reduction will have the effect of increasing the take-home pay of employees up to a maximum of £754 a year.

One of the main branches of remuneration planning for business owners is whether to take their remuneration in the form of salary, dividend, or a combination of the two.

This National Insurance reduction along with changes to the taxation of dividends over the last number of years has resulted in the tax difference between these options becoming smaller and smaller.

Over a number of years, the established approach has been to take a small salary, to ensure that entitlement to State Pension is obtained, and to take the remainder of any remuneration as dividends.

Following the reduction in National Insurance this has not changed for the vast majority of cases. Although the tax saving of dividends compared to salary has been reduced, there is still a small saving in using this route.

Consider a fairly common situation, of a business owner whose only income comes from their company.  They want to maximise their pay after tax, but also maintain full entitlement to child benefit, and not pay higher rate taxes.  Therefore, they wish to cap their gross income to £50k.

One option would be to take a £50k salary from their company. The company would suffer employers National Insurance on this but then also receive Corporation Tax relief for both the salary and National Insurance cost.  Assuming the company is paying Corporation Tax at 25%, this would be a net cost to the company of £41,374.

The business owner would of course pay Income Tax via PAYE on the salary, and National Insurance at the reduced 10% rate. This would give them take home pay of £38,771. This therefore providing a tax efficient of 94% of the company cost ending up in the owner’s pocket.

Let’s consider the position using the current meta, to take a £12k salary to ensure entitlement to State Pension and other benefits, and then £38k in dividend income, to again bring us to the £50k gross income.

The salary is below the National Insurance limits, so the company is not required to make any contributions, but still gets Corporation tax relief on the salary. There is no tax relief for the dividend payment. The cost to the company is therefore £47k.

For the business owner, the salary will be covered by their tax-free personal allowance and below the National Insurance thresholds. Therefore, they will only suffer Income Tax on their dividends after the dividend allowance. This will give them take home pay of £46,812. This therefore providing a tax efficient of 99.6% of the company cost ending up in the owner’s pocket.

As can be seen the dividend route has a higher cost to the company, but more of that cost ends up in the owner’s hands and is therefore more tax efficient.

A similar outcome occurs at the £100k threshold.  When an individual’s income exceeds £100k they begin to lose their personal allowance, and therefore where possible it is often advisable to keep gross income below that level. Taking the same approach and considering a gross £100k salary to a £12k salary plus £88k in dividends provides the below outcome.

Option 1 Option 2
Salary 100,000 12,000
Dividend - 88,000
Employers NI 12,065 -
Corporation Tax relief (28,016) (3,000)
Cost to the company 84,049 97,000
Business Owner
Salary 100,000 12,000
Dividend - 88,000
Employees NI (4,445) -
Income Tax (21,052) (19,995)
Take home pay 58,553 80,005
Tax efficiency 70% 82%

As can be seen this follows the same pattern, the dividend route is more expensive for the company, but a higher proportion of that cost is received by the business owner.

When considering remuneration planning it is always important to know what you are trying to achieve.  Is there are specific level of net income you require to fund your lifestyle? Do you need to show a certain level to total income for finance or visa applications? Are you considering a company sale and want to consider if it is best to withdraw funds or leave them in the company? There are varying considerations for each of these.

But what about if your situation is not that simple? Maybe you already take a salary from your business at a higher level or have benefits in kind (such as a company car), what should you do then?

Unfortunately, the closing of the gap between dividends and salary means that there is no quick and easy answer to this question, and the position will depend on your exact circumstances. There are a few things to consider:

  • If you have salary utilising your basic rate band (£50,270 plus) then taking salary instead of dividend is more tax efficient – however, care needs to be taken if you have multiple employments as National Insurance would be calculated on each employment, removing this saving.
  • Do you have allowances that are not being utilised, for example the savings allowance and starting rate band, potentially up to £6k of interest income which can be tax-free. If you have lent your company funds it may be worth charging interest to take a tax-free income whilst obtaining tax relief in the company.
  • Pension contributions remain a very tax efficient part of remuneration planning. With the increase in the annual pension allowance to £60k and the ability to use unused allowances from the previous three years, it may be time to have a look at your pension provision.
  • Tax is not the only important factor in deciding how to remunerate yourself, and with the difference between dividend and salary shrinking, these other factors may now have more weight. For example, if you are obtaining finance or re-mortgaging, this is often easier if you can show a lender a salary rather than dividends as your main source of income.

Remuneration planning is no longer one size fits all, and the tax and non-tax considerations are ever increasing. As the difference between dividends or salary has reduced, therefore your aims and personal requirements will play a greater role in how to extract funds from your company.

If you have any questions or would like to consider your remuneration strategy, then please get in touch and we will be happy to help you through these ever-changing waters.

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