Is £10k the optimal 2014/15 salary when 10% dividend tax credit is factored in?

[MickeyP]

What is the most optimal salary for 2 shareholders, 60/40 split, no other income.
Can £7,956 be paid to the director with 60% shares and £10,000 to the other shareholder with 40% shares ? The idea is to use the other shareholder's tax allowance close to maximum.

Same question. 50/50 split. One salary. No other income. 10k still?

[Martin at NixonWilliams]

This depends on a lot of things really.. such as whether the second shareholder has any other income, whether there is a requirement to earn a qualifying year towards their state pension or whether you are prepared to suffer a bit of higher rate tax. Broadly speaking, for the two questions that have been asked:

Lumiere - This is a tricky one as I suspect that the second shareholder is not a fee earner in the company? If this is the case, the question that probably needs to be asked is whether it is commercially viable for the second salary to be paid/increased. For example, if the second shareholder is being paid for a few hours admin work each month I would say it is out of the question to increase the salary to £10,000.

MickeyP - In a 50/50 situation where I assume you are keen to avoid higher rate tax, avoid a share transfer but you would like to earn a year towards your state pension, then the best option would be to pay a salary in line with the lower earnings limit (£5,772 pa). This is the lowest amount of salary that could be paid to you without losing out on a qualifying year towards your state pension, therefore increasing the amount of allowance available before hitting higher rate tax for both shareholders. If there is no need for you to earn a qualifying year, dividends only is likely to be the better option for you.

One very useful bit of planning that can benefit both examples above is to pay some or all of the salary into a pension. For example, in MickeyP's situation, if a salary of £10,000 is paid to s/h 1 and none to s/h 2, then s/h 1 could make a gross pension contribution of £10,000 (a net contribution of £8,000) to extend their basic rate band, therefore equalising the amount of dividends that can be paid tax free to both shareholders.

I hope this helps.

Martin

[TheCyclingProgrammer]

What Martin said, particularly about there being lots of variables to consider, but generally speaking...if you're the sole shareholder, £10k is probably going to be the most tax efficient salary for you.

If you aren't the sole shareholder and you want to maximise the take home for all shareholders, £10k probably isn't the best option as it will reduce the amount of dividends the other shareholder will receive.

Any salary paid to a spouse/partner/anybody needs to be commercially justifiable in order for it to be tax deductible for CT purposes. If said spouse/partner is a director/company secretary then a couple of grand might be reasonable. If they do additional work for company you might be able to pay more. You can't just pay them their full personal allowance as salary (assuming they are otherwise unemployed) if they aren't a director/company secretary and don't do anything for the company*. Talk to your accountant.

* well strictly speaking, YourCo can pay whatever salary it likes to whomever it likes, its just a case of whether it would be an allowable deduction for CT. If it's challenged and you can't justify it, you'll owe 20% of the salary in extra CT.

[TheCyclingProgrammer]

A plugged a few figures into my spreadsheet, hopefully this helps.

As above, if you're the sole shareholder, then £10k is going to be the most efficient salary, maximising your income up to the higher rate threshold whilst saving corporation tax.

If you have a 50/50 split with your spouse, assuming your spouse has no other income and to keep things simple, isn't paid a salary, then:

A £10k salary + dividends up to the higher rate threshold for the main earner, plus the same amount of dividends to the other shareholder yields a total income for both shareholders of £67357, with a £2000 CT saving.

As above, with a £7696 salary yields £69200 with a £1539 CT saving.

As above, with a £5772 (LEL) salary yields £70739 with a £1154 CT saving.

As you can see, the extra £3382 take home on the smallest salary clearly outweighs the extra £846 CT saving on the higher salary.

If you have a different share split (e.g. 75/25, 60/40) then the most efficient salary is still going to be somewhere around this level.

[northernladuk]

Why don't the two people posting questions pay their partners what they are worth to the business rather than using them as tax mules?

[MickeyP]

This depends on a lot of things really.. such as whether the second shareholder has any other income, whether there is a requirement to earn a qualifying year towards their state pension or whether you are prepared to suffer a bit of higher rate tax. Broadly speaking, for the two questions that have been asked:

Lumiere - This is a tricky one as I suspect that the second shareholder is not a fee earner in the company? If this is the case, the question that probably needs to be asked is whether it is commercially viable for the second salary to be paid/increased. For example, if the second shareholder is being paid for a few hours admin work each month I would say it is out of the question to increase the salary to £10,000.

MickeyP - In a 50/50 situation where I assume you are keen to avoid higher rate tax, avoid a share transfer but you would like to earn a year towards your state pension, then the best option would be to pay a salary in line with the lower earnings limit (£5,772 pa). This is the lowest amount of salary that could be paid to you without losing out on a qualifying year towards your state pension, therefore increasing the amount of allowance available before hitting higher rate tax for both shareholders. If there is no need for you to earn a qualifying year, dividends only is likely to be the better option for you.

One very useful bit of planning that can benefit both examples above is to pay some or all of the salary into a pension. For example, in MickeyP's situation, if a salary of £10,000 is paid to s/h 1 and none to s/h 2, then s/h 1 could make a gross pension contribution of £10,000 (a net contribution of £8,000) to extend their basic rate band, therefore equalising the amount of dividends that can be paid tax free to both shareholders.

I hope this helps.

Martin

Thanks Martin. Have PM'd you.

[Martin at NixonWilliams]

Other variables which I have not covered in any detail is the effects these choices might have on when you decide to close the company, or the effects this might have on your companies and not just the benefits personally in terms of extra allowances.

Consider a £5,772 salary vs. the £10,000 salary. If you choose the £5,772 salary the chances are you and your spouse will benefit from a higher allowance before paying any high rate tax, but you will lose out on £845 corporation tax relief (granted, you will suffer approx £245 in employees NI).

For example, if the dividends are being declared broadly in line with the profits available each month and the company is then closed with funds of less than £21,800 (2 x CG allowance), there would be no benefit to paying the lower salary and creating additional allowances as the funds will be taken tax free anyway - & by then you would have lost out overall due to the lost corporation tax relief.

Likewise, your existing / future contract rate may decrease to a level that means you do not necessarily benefit from the increased allowances that have arisen by the fee-earner paying a lower salary, & you could end up worse off again.

If you will benefit from the extended allowances and you are interested in making pension contributions then my earlier suggestion of the fee-earner making pension contributions in line with the salary being paid is a winner all round really with a £10,000 salary being paid - there is no risk of losing corporation tax relief and both shareholders could receive the full £41,865!

As TCP points out, there are many, many more things that could be considered, many of which would be hypothetical and therefore not entirely reliable, but I hope this provides a couple of other realistic viewpoints that might affect your circumstances in a different way to those already discussed.

I hope this helps.

Martin

[Andrew@Wisteria]

For our clients drawing up to the high rate tax band, we're recommending a salary of £7,800.

The net pay (salary and divs) is the same as the £10k salary, but with the additional hassle of paying PAYE/Employer's NIC each quarter.

[Martin at NixonWilliams]

For our clients drawing up to the high rate tax band, we're recommending a salary of £7,800.

Why not £7,956?

The net pay (salary and divs) is the same as the £10k salary, but with the additional hassle of paying PAYE/Employer's NIC each quarter.

Yes the take home is broadly the same but the £10,000 saves you an additional £440 in CT?

[jamesbrown]

with the additional hassle of paying PAYE/Employer's NIC each quarter.

Additional hassle for whom?