Tony Granger looks at various remuneration strategies for company directors.
This article offers a brief insight into some of the remuneration strategies that company directors can employ to ensure the most tax-efficient remuneration package for themselves.
Many directors merely take salary and may also have a company car and other benefits. Some may include dividends if the company is profitable. There are a wide range of additional benefits, if purchased on a group basis that can increase net disposable income, as opposed to individually using after-tax money to buy them.
Two of the biggest expenses (apart from paying the tax) for an average director are school fees and paying the mortgage. Company cars can cost up to 37% of the list price each year and are therefore potentially expensive.
Core remuneration strategies
These include salary, dividends and employer pension contributions. From 6 April 2018, the dividend allowance reduces to £2,000 (from £5,000). There are no tax credits anymore, and the rates of tax applying after the dividend allowance are 7.5% for dividends falling within the basic rate band, 32.5% for dividends falling within the higher rate band, and 38.1% thereafter. Compare this to income tax rates on most other forms of taxable income at 20%, 40% and 45%. Any surplus funds in the company could be paid to you as dividends, but these can only be paid from distributable profits after corporation tax.
It is often tax-efficient to have other family members as shareholders. The first £2,000 of dividend income is tax-free for all shareholders. Employer pension contributions can sometimes create efficiency in remuneration as well.
You need to take into account how much salary to take (ensuring state benefit entitlement is protected), the level of dividends available from distributable profits and the funding of pension schemes (e.g. within the annual allowance, plus any carry forward allowance available).
Effective remuneration structuring can not only save tax, but also increase net disposable income. Consider a remuneration planning exercise to obtain the best result for you.
- Make the best use of tax-efficient benefits-in-kind. These might include employer-provided pension advice up to £500; employer supported childcare and workplace nurseries; cycle to work schemes and ultra-low emission cars (below 75g/km emissions).
- Employer paid or subsidised mortgages.
- Company cars – the tax on company cars can be as high as 37% for a car with high emissions of CO2. If a car cost £60,000 and you are a 40% taxpayer, you could pay £60,000 x 37% x 40% = £8,880 in tax. So consider a cheaper car with lower fuel emissions.
On the final bullet point above, an alternative to a company car might be taking a company loan towards buying a car instead and claiming mileage allowances. Beneficial loans up to £10,000 have no benefit-in-kind tax. For higher loans, you only pay tax on the interest rate difference between what you pay and the HMRC official rate of interest, currently 2.5%. So, on a £60,000 interest-free loan, the position for a higher rate taxpayer is: £60,000 x 2.5% = £1,500 x 40% = £600 tax per annum.
Practical Tip :
A comprehensive remuneration planning exercise taking personal objectives into account can be very efficient, and in some cases could save thousands of pounds in tax
This article was first printed in Business Tax Insider in May 2018.