The new tax year starts on Friday and so for the owner-managed business its time to sort out your remuneration for 2018/2019. Getting this right can ensure you pay as little as possible while making sure you enjoy all the benefits available.
Below are the recommendations for this year.
The level at which to set the owners salaries depends on whether the business has any other employees. If you have other employees, you are able to claim the employment allowance, which allows you to claim back the employer’s national insurance up to £3,000 in a year. Sole employee businesses are not able to make a claim. But if you have two or more employees [including your spouse], then you can claim it. A warning though if you have so many employees that you already claim the employment allowance in full, then it doesn’t work either.
So if you can take advantage of the employment allowance, the owner’s salary should be set at the personal allowance level of £11,850.
If you can’t claim the employment allowance, then the salary should be set at £8,424.
Both of these arrangements will also mean that 2018/2019 will be a year which will count towards your state pension entitlement.
The dividend allowance introduced two years ago falls to £2,000 from £5,000, but dividends still represent the best choice for the next slice of remuneration. The optimum profit level for incorporation compared to self-employment is £70,000 per year, but above this, the advantage starts to fall away.
In fact, surprisingly now, when profits exceed £145,000 per partner, it is better to be self-employed.
Where a Director has a loan account in credit with the company – when the company owes them, one should now consider paying interest on the loan. Up to £6,000 per year can be paid using the savings allowance and savings starting rate.
As interest rates are so so low, it makes sense to leave funds in the company and pay a commercial interest rate – as long as the company is not in financial peril.
The tax advantages to having a limited company are diminishing, but careful planning can ensure that at least any downside is reduced to a minimum.