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Often, small business owners work through a limited company paying themselves a meagre salary plus dividends. It’s a popular way of organising your earnings. However, people operating in this way missed out on financial help during the pandemic. Government support didn’t cover dividend income. And dividend taxation will increase from April onwards. So, is there a better way to achieve tax-efficient owner-director remuneration? 

 

Options 

Let’s assess the options. Withdrawing net profits as dividends alongside a small salary makes sense. From a simple tax perspective, that is. One word of caution, though. Ensure your salary meets the National Minimum Wage regulations. Also be aware of the planned rise in corporation tax rates. Rates go up to 25% from April 2023. This may alter the balance. 

  

Example 

Using 2022/23 rates on profits of £50,000, take home pay based on dividends and salary would be £39,767. By comparison, a self-employed person would earn £38,238 after tax and NICs. Meanwhile, a director paid a salary only would receive £33,563 based on net income after PAYE and employee and employer NICs.  

 

A better way? 

So, how to achieve a tax-efficient owner-director remuneration? One option is to withdraw funds in conjunction with a spouse or civil partner. Alternatively, you could retain funds in the business. Then, withdraw money when you sell up. This would be a capital gain. The obvious benefit here is the CGT tax rate. On business sales it’s only 20%. Although the tax rate could be even lower. Just 10% if you’re eligible for Business Asset Disposal Relief. But be realistic. Can you afford to leave money tied up in your business long term? What will you live on in the meantime? 

 

Attractive CGT rates 

Currently, CGT rates are more favourable than income tax rates. Yet, this won’t always be the case. What if the government raises CGT rates? Parity with income tax rates is a distinct possibility. 

 

Investigate other savings 

Realistically, taxes will rise during the next five years. Many allowances and rates will be frozen at existing levels. So, what about other savings avenues? Think about business rates relief. It could offset the forthcoming increase in the dividend tax rate and static income tax bands. At least in the shorter-term.  

 

More than tax 

Don’t be blinkered. Reducing your tax bill isn’t everything. Other factors will likely come into play. How will the IR35 regulations affect you? You could see your earnings automatically subject to PAYE and NICs. 

 

Keep it simple 

Sometimes, the simplest option is best. Even if it’s not the most tax efficient. Therefore, being self-employed may suit some owner-directors. For others, limited liability is non-negotiable. Consequently, they choose to operate as a limited company or LLP. 

 

Advice on tax-efficient owner-director remuneration 

In the coming years, we’ll all face tax rises. Along with higher interest rates and increased inflation. It’s worth talking to specialists to achieve a tax-efficient owner-director remuneration. After all, mitigating tax is only one consideration. The big question? It comes down to your ambition. If you need help, call our tax team on 01785 243276.