From 6 April 2018, the dividend allowance reduces from £5,000 to £2,000. Shareholders/directors should consider how they can best maximise the tax relief available and we can help you in making that decision.
Dividend income that exceeds the dividend allowance will still be taxed at lower rates than salary and there is no class 1 national insurance (NI) to pay on dividends. Thus, extracting funds in the form of dividends is likely to be more tax-efficient than salary, where the company has sufficient distributable profits.
However many directors will take a small salary to ensure that they continue to have credits for national insurance purposes thus increasing their entitlement to state pension. Such salary payments will be eligible to tax relief in the company at 19% but will be taxed in the individual’s hands at 20% or more.
In certain circumstances it may not be tax efficient to take a salary to obtain credits for national insurance towards your state pension. If you have already accrued 35 years of national insurance credits then you will already be eligible to receive the full flat rate of state pension when reaching state pension age.
You can check your own national contributions history by logging on to your personal tax account (PTA) at www.gov.uk/personal-tax-account. Alternatively you can apply for a state pension forecast at www.gov.uk/check-state-pension.
If you are already entitled to a full pension then, provided your company has sufficient distributable profits, you could draw these as dividends rather than taking a salary.
If you don’t have sufficient contributions, perhaps because you have had years when you haven’t worked or you have contracted out of the state pension, then it is likely to be beneficial to draw a small salary to accrue the NI credits.
If you would like more information or assistance in deciding what level of salary to take from April 2018 please contact us.