As an owner-manager, your chief concern will be making your business profitable and building up cash reserves in the company. But you’ll also want to be able to take out funds from the business too – whether this is via a regular monthly salary, or ad-hoc dividend payments.

Salary vs dividends is the most common way to take out funds from your business, but there are a number of different ways, all of which can have different tax and capital impacts – both for you personally and for the company as a whole.

Because of this, it’s important to have a clear and workable ‘remuneration’ strategy – which clearly sets out how and when you will be able to take funds out of the company.

Building a tax-efficient remuneration strategy

Whilst you’re building your business, you should ideally be also paying yourself an income.  It’s not always natural but is important if you are to build a successful business. 

But what’s the best way of taking out that money?

Salary or dividends for example, are they the best solution?  If so, how do you to split income between them?  Let’s look at the key considerations.

Salary:

• Your first choice is generally to ask, ‘How much should I take as a salary?’. 
  Presuming that you don’t have a contract of employment with your company (most owner-managers don’t) then the National Minimum Wage legislation doesn’t apply.

• To build up credits (contribution years) for the state pension, your salary has to be paid at a rate that’s equivalent to at least the Lower Earnings Limit (LEL) of £533/month.
  Generally, therefore, a salary of at least that amount should be taken.
   
• There’s a ‘sweet spot’ between £533 and £758/£1,048 where no NI is payable , which can be a big factor in the amount of salary you pay yourself.
  This sweet spot doesn’t exceed your income tax threshold as an individual – you’re actually considered to be a contributor to earn state pension benefits and the salary is deductible against the company’s profits for corporation tax purposes.

• Above this sweet-spot level, it’s sensible to consider whether or not to take dividends.

Dividends

Dividends can only be paid out of after-tax company profit, so your business does need to have delivered this profit before you can extract any cash as a dividend payment.

• The first £2,000 of dividends are tax-free, but above that the rate depends on which tax band the dividends fall into. If you have any unused personal allowances, then dividends that fill that gap are tax-free.

• Dividends in the basic-rate band (generally total income between £12,570 and £50,270) are taxed at 8.75%. Dividends in the higher-rate band are taxed at 33.75% and anything above that is taxed at 39.35%.

Other ways:

Whilst salary & dividends are the most popular way to take money from the business, you can also consider:

• Paying off amounts due on any director’s loan account, 
• Making a loan to you as a director (which can have other consequences), making contributions to your director’s pension fund 
• Providing benefits in kind.

As with all of these things, the driver behind your remuneration strategy needs to be the needs of the business, not the short-term, positive tax implications for you personally. 

There will always be specific considerations to factor in for each scenario and each individual – so it’s worth talking to your accountant in advance of extracting any funds from the business.

Talk to us about your remuneration strategy

In most cases, there’s no shortcut to crunching the numbers when it comes to creating a robust remuneration strategy. 

We can help you through the maze of both company and personal tax, and complex (and sometimes opposing) effects that company and personal taxes can have on each other.

We’ll help you to review your business and private wealth situations and generate a remuneration strategy that’s tax-efficient, straightforward and well-suited to your cash needs.

Get in touch to talk through your remuneration plans.