Pre Year End Tax Planning – Dividends Planning & Corporate Salaries
Following on from our summary of pre 5 April tax planning tips, we explore the tax implications of paying salary and dividends from your owner managed private company.
The Scottish rates of income tax came into force in 2018, with the implementation of a lower basic / intermediate rate tax band for Scottish taxpayers. Salary is taxed as “non-savings, non-dividend income” and is therefore caught by the new Scottish rates. As a result, the amount of salary taxed at the basic / intermediate rate is £6,608 lower compared to those who live elsewhere in the UK.
Dividend income is subject to a £2,000 tax free allowance and lower rates of income tax (7.5% for basic rate taxpayers). Additionally, dividends are not caught by the Scottish rate bands. Therefore, some individuals may benefit from paying an additional dividend to fully utilise both the tax-free dividend allowance and the UK basic rate band. This could generate tax savings compared to paying additional salary of the same amount.
It is important to consider the impact of your corporate remuneration structure on both your state pension entitlement and private pension contributions. Dividends are never subject to National Insurance contributions (NIC), so if you pay a salary below the NIC thresholds and have little or no other sources of income, you may wish to make voluntary contributions to ensure your state benefit entitlement is not impacted. Your company could also contribute to your personal pension, subject to certain restrictions which are discussed in our previous article.
Additionally, if your company is likely to make a claim for R&D tax relief, bear in mind that the bulk of qualifying costs usually relate to salary, employer’s national insurance and pension contributions. Therefore, if you opt for a high dividend / low salary strategy, this may have an impact on the company’s tax relief claim.