National insurance contributions
leaving profits in the company may be tax-efficient, but you will of course need money to live on, so you should consider the best ways to extract profits from your business. A salary will meet most of your needs, but you should not overlook the use of benefits, which could save income tax and could also result in a lower NIC liability.
Five key NIC-saving strategies:
- Increasing the amount the employer contributes to company pension schemes. Care should be taken however as there are limits on the amount of pension contributions an individual can make both annually and over their lifetime
- Share incentive plans (shares bought out of pre-tax and pre-NIC income)
- For some companies, dis-incorporation and instead operating as a sole trader or partnership may be beneficial
- Instead of an increased salary, paying a bonus to reduce employee (not director) contributions
- Paying dividends instead of bonuses to owner-directors.
Increasing your net income as an owner-director
As an example, consider how much you might save if, as an owner-director, you wanted to extract £10,000 profit (pre-tax) your company makes in 2018/19 by way of a dividend rather than a bonus. We have assumed in this scenario that the director has already taken salary in excess of the upper earnings limit for NIC, is a 40% taxpayer, and the £2,000 dividend tax allowance has already been utilised.
|As you can see in this case study, the net income is increased by 7% by opting to declare a dividend. Be sure to discuss this with us, as this is a complex area of tax law.|
|Bonus £||Dividends £|
|Profit to extract||10,000.00||10,000.00|
|Employers’ NICs (13.8 on gross bonus)||-1,213.00|
|Corporation tax (19% – dividend is not deductible for corporation tax)||-1,900.00|
|Employees’ NICs (2% on gross bonus)||-176.00|
|Income tax (40% on gross bonus)||-3,515.00|
|Income tax on dividends||-2,633.00|
|Net amount extracted||5,096.00||5,467.00|
Remember that dividends are usually payable to all shareholders and are not earnings for pension contributions and certain other purposes. It is possible to waive dividends, although this can result in tax complications. Finally, you need to consider with us the effect of regular dividend payments on the valuation of shares in your company.