Many shareholders in SMEs pay themselves a small salary topped up by dividends as this is often the most tax efficient way to extract profits from a limited company. The amount of salary paid will usually be equivalent to the national insurance threshold which is currently £8,060. Paying a salary at this level means:
- No employee national insurance will be payable;
- No employers national insurance will be payable;
- The company will be entitled to Corporation Tax relief on the salary payment;
- The salary will usually be tax free for the recipient; and
- The shareholder will still be building up their entitlement to state pension.
Dividends will be both tax and NI free up to a limit of £5,000. Thereafter, dividend income will be taxed at a rate of 7.5% provided the individual’s combined income is under the higher rate tax threshold of £43,001.
Note – thanks to the government’s £3K Employment Allowance (almost every employer can claim £3K cash back on their employers National Insurance contributions for 2016/17) businesses with an employers NI bill of under £3K may benefit by paying their directors / shareholders an amount in excess of £8060 in order to claim the full relief. If you would like us to do some calculations for you then please get in touch.