Remuneration planning for owner managed companies

Following the recent change to corporation tax rates, many clients are asking if their remuneration strategy is as tax efficient as it can be.

In recent years, the standard approach for director/shareholders of owner managed companies has been to take a small salary within the personal income tax allowance and national insurance thresholds, and then the balance as dividends.

However, with the corporation tax rate increasing from 19% to 25% for profits above £250,000, and a marginal rate of 26.5% applying to profits between £50,000 and £250,000, this reduces the tax advantages of dividends (which are paid out of post-tax profits). Salary payments, which benefit from corporation tax relief, become correspondingly more tax efficient.

It should also be noted that dividend tax rates increased by 1.25% from April 2022, so dividends are now taxed at 8.75% (basic rate), 33.75% (higher rate) or 39.25% (additional rate taxpayers).

For many people, the ‘small salary/large dividend’ approach continues to be marginally more tax efficient than just taking salary. However, it is worthwhile checking that your current salary /dividend mix continues to be as tax efficient as possible considering the recent tax changes.

It is also important to take account of the fact that there are several ways for a director/shareholder to lower the overall tax cost. The most common options are purchasing or leasing an electric car through the business, making employer pension contributions, and making use of alphabet share classes to spread dividends around the family.

If you would like to have a conversation to make sure that your remuneration planning is as tax efficient as it can be, please get in touch.

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