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Family businesses advised to consider tax efficiency of payment methods

Directors of family businesses should consider the most tax efficient method of paying themselves in light of recent changes to the tax treatment of dividends.

That is the advice from Mountsorrel-based Charnwood Accountants as the 208/19 tax year gets underway and the new rules come into force.

Chris Hutton, partner at Charnwood Accountants, said:

“For many years accountants and tax advisers have suggested that director/shareholders should extract profit by paying themselves a low salary with the remainder of their income being extracted in the form of dividends.

“Although dividends are not deductible in arriving at the company’s taxable profits, they do not normally attract National Insurance Contributions (NICs). The starting point of NICs rose to £162 a week from 6 April 2018. This is now significantly lower than the £11,850 personal income tax allowance. A salary just below £162 a week, £8,424 a year would mean no NIC would be due but would be sufficient to count as a qualifying year for State Pension purposes (if above £6,032 lower earnings limit).”

Chris added that employers other than those where the director is the only employee are entitled to a £3,000 employment allowance that can be set against employer’s NICs.

He said:

“If this has not been utilised against NICs on staff wages then consider increasing the directors’ salaries up to £11,850, as the additional salary would save corporation tax at 19% on the £3,426 extra salary which equals £651, whereas the employees NIC would be £411.

“As far as the level of dividends is concerned, the rate of tax changes from 7.5% to 32.5% at £46,350 so ideally the dividends should not exceed £34,500 if a salary of £11,850 is paid. The first £2,000 would be taxed at 0% with £32,500 being taxed at 7.5%. Don’t forget that this tax will then be due on January 31 2020.”

“We advise taking sound professional advice to make sure family businesses extract profits as tax efficiently as possible.”

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