Revisit your remuneration?

For many SME owner-managed businesses, the tax optimum director remuneration structure for many years has been one of a low salary accompanied by high dividends. This allows Companies to take advantage of low dividend tax rates and, in many cases, no employers national insurance to be paid by the company (if paid at the Secondary national insurance threshold), meaning that directors and companies are able to be as tax efficient as possible.

With the upcoming and present below changes, is it time to consider a change to your remuneration structure?

The recently announced Companies House reform for SME businesses, for filed accounts to include the Profit & Loss Account, will disclose the period profit and the total value of dividends paid out to the shareholders (previously these were filleted out). Turnover and profit margins will also be readily available to users of the accounts. With these figures entered into public record, it may be recommended to change the structure (increase the salary/decrease the dividends) to “hide” directors remuneration within admin expenses/cost of sales and retain “profit privacy”. Under certain accounting standards, directors remuneration does not need to be disclosed within the notes of financial statements.

The recent uplift in dividend tax rates by 1.25% from 5 April 2022 has narrowed the gap between PAYE and dividend rates, eroding some of the benefit of a high dividend remuneration package.

Unlike PAYE tax collected on salaries, tax on dividends is collected through the self-assessment tax return, submitted to HMRC by 31 January following the end of the tax year. Tax for dividends is not paid in real time or deducted monthly, relying on directors putting away a proportion of their dividend income to be able to meet the 31 January and 31 July HMRC payment deadlines. Many directors struggle to manage savings to meet these personal tax obligations and therefore a high salary/minimum dividend package may be preferential, as all tax will be collected automatically through PAYE.

As usual, should you have any queries or would like to discuss your remuneration package further, please do get in touch with your normal Whitings contact.

Disclaimer - All information in this post was correct at time of writing.