Extracting profit from your business

The start of the new tax year means that shareholder/directors may want to review the salary and dividend mix for 2019/20. The £3,000 employment allowance continues to be available to set against the employers national insurance contribution (NIC) liability. Please note there is no entitlement for the allowance if only a solitary Director is liable to employers NIC.

Please note: 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.

Taxation of Dividend Payments in 2019/20

Traditional advice would then be to extract any additional profits from the company in the form of dividends.

Total dividends up to the top of the basic rate band (now £37,500) attract tax of 7.5% after the £2,000 dividend allowance has been used. Where husband and wife are 50:50 shareholders they would 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. So a combination of £12,500 salary and £37,500 in dividends would result in net income of £46,873 (93.7%).

Ensure dividend payments are legal

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 have profits after corporation tax of £75,000, in the above example.

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 favorably with the amount of tax and NIC payable if the couple were trading as a partnership.

 

We recommend that you seek the advice from a qualified accountant before making any tax planning decisions to ensure you have a tax plan that suits you get in touch or call 0161 249 5040