Extracting profit from the family company via dividends
May 09, 2019
Personal Finance Tax Tips
The start of the new tax year means that if you are a shareholder or director you may wish to review your salary and dividends mix for 2019/20 (in combination with utilising the £3,000 NIC ‘employment allowance’ where it is available).
As a general principle, this will involve maximising your personal tax allowance (now £12,000), your dividends allowance (continuing at £2,000) and the basic rate tax band that is now £37,500, all in overall combination with similar arrangements for your spouse or civil partner, where that is feasible.
Taxation of dividend payments in 2019/20
Putting aside any other sources of your income, applying the principles above to their maximum (where your company’s profits allow) means that if you hold shares 50:50 with your spouse you can, under these circumstances, each expect to have a post-tax income of £46,837 for the current tax year.
Ensure dividend payments are legal
Note that legislation stipulates that companies may only pay dividends out of distributable profits, meaning profits retained in the company after provision for corporation tax on its profits.
It is also vitally important that dividends are correctly authorised (via minutes of directors’ meetings), without which HMRC can be expected to insist that PAYE and NIC apply to this income, which is likely to involve significantly greater expense.
The position for you and your business
Overall, the combination of salary and dividends suggested above would result in a post-tax income in 2019/20 of £93,674 for a couple, which itself would require profits in the business of £117,593 (before salaries and corporation tax).
This overall level of return still compares very favourably with the amount of tax and NIC which you and your spouse would have to pay if you were trading as a partnership.
Please get in touch with the PT team if you have any questions about balancing your salary and dividends to ensure you’re as tax efficient as possible.