Owner Managed Businesses and Tax Efficient Remuneration

If you own and/or run an Owner Managed Business (OMB) then at some point you will have considered not only the most tax efficient way to remunerate yourself, but also most likely the other key directors and employees of your family-owned business.

When looking at this there are several important factors to take into account. Ways of remunerating your directors will vary enormously from business to business, so it’s vital to weigh up the taxation and other implications of each profit extraction method: salary, bonus and/or dividends. Here are my top points to further aid your cogitation:

• Consider the tax rates – dividends are taxed at lower rates than salary. For higher/additional rate tax payers, dividends are taxed at 32.5/42.5% compared to 40/50% on salary/bonus. The dividend rates are further reduced by a 10% tax credit to 22.5/32.5% respectively. National Insurance contributions (NIC) are also not payable on dividend income.  However, dividends are taken after taxable profits, whereas salary is a deduction for corporation tax purposes.
• Certainty and timing of payments – With corporation tax rates reducing, there will be increased profits after tax available for distribution. But your business must have sufficient profits after tax to pay dividends, which is riskier for the parties involved. Dividend payments are flexible, in terms of timing and amount, while a monthly salary is fixed, providing less flexibility for the business.
• Cashflow considerations – if your director/employee is paid a salary/bonus, your company is responsible for deducting and paying the tax at source to HM Revenue & Customs (HMRC). If dividends are paid, these are included within the recipient’s personal tax return which they’re required to submit to HMRC annually and tax payments on account need to be made throughout the year.
• Pension considerations - dividends are not treated as ‘earned’ income for pension purposes, so your directors will need to consider whether they have sufficient pension provisions before reducing salary and increasing dividend payments.

You can contact me at HCB Solicitors on 0844 556 8674 if you would like to discuss any of these, or indeed other tax issues.