F (No 2) A 2017 received Royal Assent on 16 November 2017. Section 8 of that Act reduces the dividend allowance from £5,000 to £2,000 from 6 April 2018. This will affect the amount of tax payable by the shareholder/ director for 2018/19.
Where the company’s shares are held by a number of family members, to take advantage of the dividend allowance, this share structure may need to be reviewed, and amended if necessary before 6 April 2018.
Dividend income that exceeds the dividend allowance will still be taxed at lower rates than apply to salary, and there’s no class 1 NIC to pay. Thus, extracting funds in the form of dividends is still likely to be more tax efficient than as a salary, where the company has sufficient distributable profits. A salary will provide the company with tax relief at 19% and be taxed in the individual’s hands at 20% or more.
Traditionally an owner/ director has paid himself just enough salary to accrue a NI credit for the year, but is this necessary for business owners in their mid-fifties? Such individuals need to accrue 35 years of NI credits to receive the full flat rate state pension on reaching state pension age (SPA).
If you log into your personal tax account at gov.uk/personal-tax-account you will be able to see how many years of NI credits that is needed to be accrued to reach this 35-year target.
Note : Tax agents still don’t have access to their clients’ personal tax accounts, so will have to look over their client’s shoulder to be able to see this information.
Some people will discover they have accrued 35 years of NI credits, but they still don’t qualify for the maximum state pension (£159.55 per week), as they had contracted out of the state pension for some years. Those individuals can carry on accruing NI credit to increase their state pension entitlement.
Those who have achieved the maximum pension entitlement could stop paying themselves a salary, and if there are no other employees, close down their PAYE scheme. You should advise on the downsides of taking no salary, such as; reduced income profile for borrowing, and losing access to jobseekers’ allowance, maternity or sick pay. But for people who work for themselves those state benefits are largely irrelevant.