To reduce National Insurance costs, shareholders of small privately owned companies, who are also working directors of the company, can structure their remuneration package to reduce their salary and make up the difference as dividend payments.
This remains one of the most useful ways for owner directors of small companies to reduce their overall tax and NIC costs.
Dividends are not considered to be a business cost. They don’t reduce the amount of profit assessable to corporation tax.
Rather, dividends are a distribution of profits after corporation tax has been deducted.
At present company reserves available for distribution will have already suffered a potential 19% corporation tax charge, so only 81% remains available.
This remainder can be retained to finance future investment or accumulated as a rainy-day fund to perhaps see you through more difficult trading periods. Or alternatively it is available to distribute to shareholders as dividends.
Consequently, the withdrawal of dividends creates no tax consequences for the company, but it can create income tax bills at one of three hybrid rates for the recipient shareholders.
For 2018-19, the following rules apply:
Shareholders will pay:
- No tax on the first £2,000 of dividends received from all sources.
- 7.5% tax on any dividends that form part of their basic rate band.
- 32.5% tax on any dividends that form part of their higher rate band, and
- 38.1% tax on any dividends that form part of their additional rate band.
So as long as any dividends you take do not push your income after allowances above the basic rate tax band, then a tax payable rate of 7.5% is modest.
The argument in favour of a low salary high dividend approach for owner directors of small companies is still an appropriate and acceptable tax planning strategy but because every person’s tax affairs are unique, this may not be the best-fit strategy in your particular circumstances.
As the tax regime for dividends looks to be hardening in future years, if you would like to discuss your options please get in touch.