Insights

Owning your own company means you can have maximum flexibility and control over how you formulate your own remuneration strategy. When considering the alternatives available to you, here are the things to consider:

How much to take as salary? A certain level of salary should always be considered as a way of protecting your national insurance contribution history, and hence your state pension. The decision around salary levels depends on whether you want to take a commercial rate of salary, or something lower. This is often a commercial decision to be discussed alongside discussions around your exit strategy.

How much to take in dividends? As from this tax year, starting 6 April 2018, the dividend allowance has been reduced to £2,000 from its former level of £5,000. Dividends within this amount are tax free and dividends exceeding this amount are taxed at either 7.5% if they fall within your basic rate band, 32.5% in your higher rate tax band or 38.1% in your additional rate band. This is an increase on former rates but is still more tax efficient than the corresponding rates of income tax – 20%, 40% and 45%.

If the company has a number of shareholders, each shareholder is entitled to a £2,000 tax free dividend in the tax year.

How much can you contribute to a pension? Maximising pension contributions (whilst not exceeding the pension cap) is extremely tax efficient, and pension fund rules are far more flexible than they used to be. For anyone who earns £110,000 or less, the annual allowance for pension contributions is currently capped at £40,000 although a lower limit of £4,000 may apply if you have already started drawing a pension. For people earning above this, the amount they can pay into a pension without incurring surcharges will taper off, reducing to £10,000 for the highest earners. Income for this purpose includes income from all sources, including property and investment related income.

What else is there? Once pension contributions have been considered, the next area to focus on is tax efficient benefits in kind. The government has restricted what can be allowed as ‘salary sacrifice’ now, but there are still a number of useful options. The best ones are as follows:

• £500 annual allowance for employer funded pensions advice;
• Childcare vouchers / employer subsidised childcare;
• Cycle to work schemes;
• Ultra-low emission company cars (below 75g/km emissions);
• Beneficial company loan (up to £10,000).

When formulating a tax efficient remuneration strategy, it is important to take many factors into consideration including your long-term business strategy and personal financial obligations. This article provides some useful food for thought, but every person’s situation is unique and should be treated as such.