Example 1: Modest salary
Artyom is the sole director and shareholder of
Metropolitan Travel Ltd. In 2019/20, he draws a salary of £8,400, or £700 a
month.
This level of earnings exceeds the lower earnings
limit so Artyom will ‘earn’ a credit for state pension entitlement for 2019/20.
But it is just a little lower than the 2019/20 primary threshold (which is also
now the secondary threshold for employers), so no NICs will actually be due.
Business tax relief
While salary or wages are essential for state pension purposes, they are also deductible for corporation tax purposes.
Dividends are paid out of the company’s residual profits after corporation tax – what is left over after everything else has been paid for. The company gets tax relief for salary and wage payments, but not for dividend payments.
Strictly, wages must still be paid ‘wholly and exclusively for the purposes of the business’, but in a family company this is generally problematic only if HMRC thinks a salary payment to a spouse, civil partner or close family member is excessive for the work done in return, and is really a payment to or for the benefit of the director/shareholder.
Example 2: Higher
or lower?
Anna is the sole director and shareholder of Exodus
Cruises Ltd, and also pays herself a salary of £700 a month, totalling £8,400
for the year.
With a standard PAYE tax code for 2019/20 of 1250L,
she can earn up to £12,500 without having to pay any income tax, and her
company will get tax relief for the salary paid to her.
If she draws a salary of £8,400, she will pay no NICs,
her company will pay no NICs, there will be no PAYE income tax, and the company
will reduce its corporation tax bill by £8,400 x 19% = £1,596.
|
|
2019/20 |
|||
|
Tax
Rate |
£ |
£ |
||
|
|
Income |
Tax |
||
Salary |
0.0% |
8,400 |
- |
||
Dividend in rest of personal allowance |
0.0% |
4,100 |
- |
||
|
|
|
|
||
Standard tax-free personal allowance |
|
12,500 |
|
||
|
|
|
|
||
Balance of dividend: |
|
|
|
||
‘Dividend allowance’ |
0.0% |
2,000 |
- |
||
Balance of Dividend |
7.5% |
17,900 |
1,343 |
2019/20 |
|||||
|
£ |
£ |
£ |
£ |
£ |
|
Employer |
Employer |
Tax |
Anna |
Exodus
Ltd |
Salary plus bonus |
32,400 |
32,400 |
32,400 |
32,400 |
(24,000) |
Primary & secondary NI threshold;
Personal allowance |
(8,632) |
(8,632) |
(12,500) |
|
|
|
23,768 |
23,768 |
19,900 |
|
|
NIC rates/tax rate |
12.0% |
13.8% |
20.00% |
|
|
NIC costs/income tax cost |
(2,852) |
(3,280) |
(3,980) |
(6,832) |
(3,280) |
|
|
|
|
|
|
Anna gets net, in her hand |
|
|
|
25,568 |
|
Extra cost to company of bonus |
|
|
|
|
(27,280) |
Corporation tax (saving at 19%) |
|
|
|
|
5,183 |
At a combined cost of: |
|
|
|
|
|
Employees’ NIC |
2,852 |
|
|
|
|
Employers’ NIC |
3,280 |
|
|
|
|
Income tax |
6,832 |
|
|
|
|
Less: Corporation tax (saving) |
(5,183) |
|
|
|
|
Total |
7,781 |
|
|
|
|
|
Taxpayer is: |
|
|
|
Basic rate |
Higher rate (£50k+) |
Additional rate (£150k+) |
Marginal tax rate |
|
|
|
Bonus |
40.25% |
49.03% |
53.43% |
Dividend |
26.00% |
46.00% |
50.58% |
- Student loans (and now postgraduate loans);
- High income child benefit clawback where adjusted net income exceeds £50,000;
- Personal allowance threshold where adjusted net income exceeds £100,000;
- Note that for the purposes of tapering the personal pension annual allowance, the income threshold includes all income, not just relevant earnings.