Now is a good time for shareholder/ directors to review the salary and dividend mix for the current tax year (2019-20). 

In the current tax year the £3,000 employment allowance continues to be available to set against the employer’s national insurance contribution (NIC) liability.  This means that where the company has not used this allowance it may be set against the employers NIC on directors’ salaries. (This does not apply for companies with sole directors).

The result of this is that where the only employees are husband and wife there would generally be no PAYE or employer’s NIC on each employee’s salary up to the £12,500 personal allowance. 

Each director would still be liable for employee’s NIC at 12% on the excess over £8,632 (£166 per week) which would amount to £464 on a £12,500 salary, leaving £12,036 net of PAYE and NIC.

The current practice is then be to extract any additional profits from the company in the form of dividends which can be paid out of distributable profits (see below). 

Where dividends fall within the basic rate band (now £37,500) the tax rate on dividends continues to be 7.5% after the £2,000 dividend allowance has been used. So where husband and wife are 50:50 shareholders they would each pay £2,663 tax on dividends of £37,500 assuming they have no income other than a £12,500 salary, leaving a total of £34,837 net of tax.

A combination of £12,500 salary and £37,500 in dividends would result in £46,873 (93.7%) net of income tax and NICs.

The Companies Act 2006 requires that companies may only pay dividends out of distributable profits. This means that in the absence of brought forward reserves, the company would need to provide for 19% corporation tax in order to pay the dividends and there would need to be profits of £92,593 in order to pay dividends of £75,000 (after providing corporation tax of £17,593).

Overall the combination of salary and dividends suggested above would result in net of tax take home cash of £93,746 for the couple out of profits before salaries and corporation tax of £117,593 (20.3% overall tax). 

This still compares very favourably with the amount of tax and NIC payable if the couple were trading as a partnership.