Extracting profit from the family company in 2019/2020

A new tax year means that shareholder directors may wish to review their salary and dividend mix for 2019/20.

The annual employment allowance of £3,000 continues to be available to set against the employer’s national insurance contribution (NIC) liability.  This means that, if the company has not already used this allowance, it may be set against the employer’s NIC on directors’ salaries.  (Note that the allowance is not available for companies where there is only one director and the director is the only employee on the payroll).

Thus, where the only employees are husband and wife there would generally be no PAYE or employer’s NIC on a salary per director, up to the personal allowance threshold of £12,500.

There would however still be employee’s NIC at 12% on the excess over £8,632 (£166 per week).  This would be £464 on a salary of £12,500 and would result in a net salary of £12,036 per director.

Taxation of Dividends in 2019/20

The traditional advice would then be to extract any additional profits from the company in the form of dividends.

Where dividends fall within the basic rate band (now £37,500) the tax rate continues to be 7.5% for dividends in excess of the £2,000 dividend allowance. Therefore, where a husband and wife are 50:50 shareholders, they would each pay tax of £2,663 on dividends of £37,500, assuming they have no income other than a £12,500 salary.  This would leave them each with dividend income of £34,837 net of tax.

So a combination of a salary of £12,500 and dividends of £37,500 would result in total net income of £46,873 per director.  This equates to 93.7% of the gross salary and dividends.

Ensure dividend payments are legal

The Companies Act 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 dividends.  There would therefore need to be profits of £92,593 in order to pay dividends of £75,000 (after providing for 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 (an effective overall tax and NIC rate of 20.3%). This still compares very favourably with the amount of tax and NIC payable if the couple were trading as a partnership.

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