You’re a shareholder and director of three companies. You currently take a low salary from each company topped up with dividends. But is this really the most tax-efficient option?
Salary plus dividends
As a rule of thumb, the most tax-efficient strategy for taking income from a company is a modest salary plus dividends. Generally, salary should be no more than either £9,100 (the NI secondary threshold) or £12,570 (the NI primary threshold). Which of these is best depends on whether your company is entitled to reduce its NI bill with the employment allowance (EA).
Tip. If it’s not possible or desirable to pay dividends or you have directorships with more than one company, a salary of more than £9,100 can be marginally more tax efficient.
Tip. Usually, a separate NI primary and secondary threshold applies for each directorship. This means a director can earn £9,100 from numerous companies without any NI being payable. However, there’s a potential catch.
Trap. For NI purposes companies that are related share one secondary NI threshold and the directors, one primary.
Example. Ava is a director of three companies. She’s paid a salary of £9,100 from each. If the companies are not related no NI is payable on any of the £27,300 earnings. By contrast, if the companies are related only £9,100 is NI free. The NI payable on the balance is £2,512 (£18,200 x 13.8%) for the companies plus £1,178 ((£27,300 - £12,570) x 8%) for Ava.
Advantages of benefits
By taking benefits in kind instead of some salary,Ava can reduce the overall NI liability while keeping the same advantages of salary. This is possible because employees, including directors, don’t have to pay NI on benefits in kind.
Example. Jane is a director of three related companies. In 2024/25 between them they pay her a salary of £9,100. This means there’s no employers’ or employees’ Class 1 NI payable. The companies also contract for and pay for Jane’s health club membership, various streaming entertainment services and a range of other perks that she would normally pay from her net income. The total cost of these benefits is £13,000; the Class 1A NI is £1,794 (£13,000 x 13.8%). Had the £13,000 been paid as salary, Jane would have had to pay £1,040 (£13,000 x 8%) NI, but as a benefit in kind she pays nothing.
Remuneration planning with benefits
The same strategy that’s typically used for maximising tax and NI efficiency when paying a combination of salary and dividends should be used for salary and benefits. That’s to say, you should take a salary at least equal to the secondary threshold (£9,100 for 2024/25) divided between your various directorships however you see fit. Additional remuneration is taken as benefits.
Example. If Gill takes all her income from her three directorships, say £27,000, as benefits in kind, the companies would pay Class 1A NI at 13.8%, i.e. £3,726 (£27,000 x 13.8%). Instead, the companies should between them pay Gill a salary of £9,100, plus benefits of up to £17,900. There’s no Class 1 NI for the companies or Gill to pay on the salary but the Class 1A NI bill is £2,470.
If you have multiple directorships, taking a salary up to the secondary NI threshold (£9,100 for 2024/25) from each is slightly more tax efficient than dividends. However, if the companies are related for NI purposes then take a salary up to the secondary NI threshold and top up with benefits in kind.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.