What is the most tax efficient remuneration strategy for directors of owner managed limited companies in the 2012/2013 tax year?
New Tax Rates
The 2012/13 tax year starts on 6th April and with it come changes to tax and NI rate bands and limits. Directors who aim to extract profit from their company in the most tax-efficient way might need to tweak their salary to make the most of the new rates.The general idea is to set your salary at a level where no tax and NI is payable. However, because the NI thresholds are lower than the tax free allowances, concentrate on pitching your salary below these limits.
NI Limits Increase
The NI thresholds for 2012/13 will mean you won’t pay NI where your salary and bonuses for the year don’t exceed £7,590. But your company’s NI will start at £7,485, so from April 6th, the lower salary figure that’ is optimum. ie £7,485 per year or £623.75 per month.
At the salary level suggested neither you nor your company will pay NI, but the good news is you will still receive a full years NI credit to your state pension records.
More Income Needed?
A salary of £7,485 per year isn’t going to pay the bills, so you’ll want to top this up with income which doesn’t count for NI purposes. Usually this means dividends, so you should pay regular dividends, say quarterly, at the most tax efficient level; this will depend on the tax free allowances and rate bands available to you.
Up and Down Tax Limits
For tax year 2012/13, the basic tax free allowances are set at £8,105, up from £7,475 for the current year. However, the bad news though, is the point at which higher rate tax will apply drops from £35,000 to £34,370.
No Change. It won’t take long to spot that the allowance increase is matched exactly by the fall in the basic rate tax band. As a result the most tax efficient combination of salary (£7,485) and dividends (£34,990) for 2012/13 remains unchanged from the current year at £42,475.
Where you have other tax deductible allowances or reliefs, such as those given for personal pension contributions, you can increase the amount of dividends the company pays you and yet remains tax efficient.
All directors must register to complete a self assessment tax return regardless of whether any additional PAYE/NI is due to HMRC or not.
Dividends can only be paid from company profits and so the low salary, high dividend strategy can’t be used where the company does not have sufficient profits to distribute.
If you have any questions on this article and how it affects you and your business, please get in touch. Contact Julie on 07872 903849 or firstname.lastname@example.org or comment on the article below.
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