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Optimum Level of Salary and Dividends

Date posted: February 20, 2017

Optimum Level of Salary and Dividends

For many businesses trading as a limited company, taking a low basic salary with the balance of income extracted as dividends, is a common tax planning strategy.

The theory is as follows:

  • You take a low tax efficient salary no higher than the personal allowance so that it does not attract personal tax.
  • You should make sure the salary is high enough for national insurance purposes i.e. that it counts as a year’s ‘stamp’ for your national insurance history to help protect your future entitlement to state pension and other benefits.
  • The salary is a tax allowable cost for your business so corporation tax is saved at 19% (corporation tax rate for 2017/18) on the gross (pre-tax) salary.
  • Any additional amounts you extract from your company are treated as dividends which do not attract national insurance, therefore you are not paying any more national insurance than you need to be.
  • Please note that dividends are not treated as a tax allowable expense (unlike a salary) so your company does not save corporation tax on the dividends.

Many people choose to limit their total income to not go into the higher tax band (£45000 for 17/18) so they are not taxed at the higher levels of tax, but this will be a personal choice and a balance will need to be made between tax efficiency and how much of the available profits in your business you want to extract.

Salary

The introduction of the Employment Allowance in April 2014 enabled employers to not pay the first £2,000 of employers’ national insurance. This then increased to £3,000 for 16/17 and 17/18.

Typically the employment allowance means that it is slightly more tax efficient to take a gross salary all the way to the tax free allowance level (£11,500 for 17-18), however HMRC announced that from 16/17 the Employment Allowance will not be available to companies where the only person on the payroll is a director, i.e. ‘single director employee’ limited companies.

Unfortunately what they have left open as a ‘grey’ area is the situation where there is a husband and wife who are both directors taking a salary with no other employees.

As things stand it would appear this would be ok, however it seems to be that HMRC’s intention is to block companies that have no ‘real’ employees from claiming the employment allowance (the government are trying to encourage small businesses to take on employees).

Our stand on this currently is to lean on the cautious side – in the situation of a husband and wife director payroll we would advise only claiming the employment allowance if both parties have an active role in the day to day business.

There are two National Insurance thresholds you need to be aware of:

  • Lower Earnings Limit – as long as you earn above this you are protecting your entitlement to future state pension and benefits, without necessarily paying any National Insurance.
  • Primary Threshold – if you earn above this, you have to start paying National Insurance.

So the sweet-spot is to go up to the Primary Threshold but no higher.

The National Insurance Primary Threshold for 17/18 is, £157 per week or £8,164 for the year.

Therefore, we would suggest a monthly Gross Salary of £680 which stays just below this threshold.

Dividends

Dividends are taxed as follows:

The dividend allowance means that an individual’s first £5,000 of dividends are tax free.

Over and above this £5,000 the dividend income is taxed as follows:

  • If you have any un-used personal allowance £11,500 for 17-18 (£11000 16/17) then that element is tax free
  • Any dividends within the basic tax threshold and up to £45,000 for 17-18 (£43000 16/17) attract a tax charge of 7.5% (basic tax threshold = basic rate band + personal allowance)
  • Dividends above the basic tax band (£45,000 for 17-18) are charged at 32.5%
  • Additional rates of tax will apply at the upper tax band £150,000

Assuming you take a salary of up to National Insurance limit of £8164 (£8060 16/17) you can take dividends of £36836 (£34940 17/18)

This is because you have spare personal allowances, which together with the £5000 dividend tax free allowance, reduce the dividend amount which is subject to tax at 7.5%. See the table below:

 

Tax Year 17/18 Tax Year 16/17
£ Annual
Gross Salary 8164 8060
Dividends 36836 34940
Total Gross Income 45000 43000
Tax On Dividends (2138) (2025)
Net Cash In Pocket 42863 40975

 
Since we are fast approaching the end of the 16/17 tax year, consider whether you have fully utilised your personal tax allowance, your dividend tax free allowance and your basic rate band.

It may also be appropriate to look at who owns the share capital and consider gifting share to other members, such as spouses, partners or adult children.

Pensions – Automatic Enrolment

Date posted: February 13, 2017

pensions
Does your accountant do automatic enrolment?

Surprisingly, around 58% of UK accountants will not provide full automatic enrolment integration with their payroll service!

What is automatic enrolment?

Automatic enrolment places new duties on employers to automatically enrol ‘workers’ into a work based pension scheme. The main duties are:

  • assess the types of workers in the business
  • provide a qualifying automatic enrolment pension scheme for the relevant workers
  • write to most of their workers explaining what automatic enrolment into a workplace pension means for them
  • automatically enrol all ‘eligible jobholders’ into the scheme and pay employer contributions
  • complete the declaration of compliance and keep records

Do I have to do it?

Unless you only employ yourself then yes! Every employee in the UK must be offered a workplace pension and most employees in the UK must be put into one whether they like it or not.

Each employee once they have been enrolled can choose to opt out if they want to but this must be their own decision.

What do you need to do?

If you haven’t already had a letter telling you that you have to provide your employees with a pension then you soon will, you will be given a specific date when this will happen too.

Many businesses have already been fined for not complying, the penalties reaching up to £500 per day.

Let us at Riley & Co Ltd take the stress of this away with a fully automated, government backed pension scheme which will:

  • Assess all staff each time they are paid and submit payments to the pension provider
  • Communicate directly with you staff telling them about their pension
  • Allow staff to opt out online and provide them with a FREE HELPLINE to answer any queries
  • Secure a discount of up to 66% on the pension providers fee
  • Make all submissions to the pensions regulator and even the declaration of compliance

Most importantly we offer peace of mind that the burden is ours and not yours.

If you would like to discuss our Payroll or Automatic Enrolment facilities please contact us.

Digital Taxation – What Is Happening And When?

Date posted: February 6, 2017

digital-taxation

By 2020 the government is intending to move to a fully digital taxation system, the intention is to eliminate form filling and avoid unnecessary delays, as the taxpayer will no longer need to tell HMRC information that it already knows.

Consultations have been held, which closed in November 2016, with HMRC seeking to work hand in hand with customers and those impacted to understand views and concerns and make sure the design and development of the new system works for everyone.

The main changes will be:

  • Never have to tell HMRC information it already has i.e. P60 information, bank interest
  • HMRC will use third party information more effectively to reduce under and over payments
  • Customers will be able to report information digitally through their digital tax account, in close to real time rather than annually on a tax return
  • HMRC will use third party information and information provided by customers to calculate tax due
  • The digital tax account will give all customers a single, personalised view of their tax position across all their liabilities and entitlements, making it easier to see your overall tax position
  • Customers will be offered a range of payment options, including pay as you go
  • Over time the range of third party information will be extended to help reduce the burden to customers

You may have already accessed your own personal tax account via using HMRC online services which is the start of the journey to digital interaction, by March 2017 HMRC aims to have 7 million customers using their personal tax account, reducing traditional contact via phone and letter by 1.7 million.

HMRC also aims to reduce the number of people required to submit an annual tax return, currently 10 million individuals, so for those with very simple tax affairs, this could be of real benefit, for those with more complex affairs the requirement for professional advice will still be relevant.

From April 2017 HMRC aims to start using PAYE information to check whether individuals are paying the right amount of tax, with HMRC liaising with employers where discrepancies are identified.

From April 2018 the objective will be to include bank and building society interest for those savers whose interest exceeds the personal savings allowance.

From April 2018 most businesses, those that are self-employed and landlords will also be required to keep their business records digitally and to update HMRC quarterly using software and apps, the updates will then be shown in the digital taxation account.

There are potentially lots of efficiencies to be made by HMRC in this new system, but whether the dates and timescales for implementation are realistic and will be met, remains to be seen. Watch this space!