Despite changes to the taxation of dividends in 2016/17 and 2018/19, the recommended tax position for company director shareholders continues to be to take a combination of threshold salary and dividends.
With effect from 6 April 2019, the optimum director shareholder threshold salary is £8,632.
The conventional approach for director income
Taking a low basic salary, within the national insurance threshold, with the balance of income being paid as dividends has been a common approach for company director shareholders for a long time and continues to be the default approach. It provides tax efficiency, both for the business and the individual director shareholder and is based on the following:
- the director-shareholder takes a low salary, within his/her personal allowance. This means that it does not attract income tax
- the salary is set just high enough for national insurance purposes i.e. that it counts as a year’s ‘stamp’ for national insurance history (but no NI is actually payable). This helps to protect future entitlement to state pension and benefits. As noted above, for the 2019/20 tax year, beginning on 6 April, the level is £8,632
- the salary is a tax-deductible expense for the business. This means that corporation tax is saved at 19% on the gross salary
- further income is paid as dividends, which also do not attract national insurance and, therefore, means the director-shareholder is not paying any NIC contributions at all
- the “dividend nil rate band” provides a nil tax position on the first £2,000 of dividend income.
While the recent changes to the taxation of dividends mean that the tax benefits of income paid through dividends have diminished slightly, they still provide tax-efficient income.
If you would like more information about how to take your remuneration tax efficiently or discuss your tax affairs, or any other information about how we could help you and your business, please don’t hesitate to get in touch by Email firstname.lastname@example.org or call on 01273 569 088.