The reduction in the dividend allowance for 2018/19 and changes to the rates and allowances will impact on directors of personal and family companies looking to extract profits in a tax-efficient manner. As always, the optimal strategy will depend on circumstances, and professional advice should be sought.
It is generally beneficial to take a small salary, particularly where the recipient does not have the 35 qualifying years needed for the full single tier state pension. Where the employment allowance is not available (as is the case for a company with a single employee who is also a director, or where it is utilised elsewhere), the optimal salary for 2018/19 is one equal to the primary threshold for Class 1 National Insurance purposes, set at £8,424 for 2018/19 (equivalent to £702 per month).
If the employment allowance is available, for example in a family company with a number of employees, the optimal salary is one equal to the personal allowance of £11,850, assuming it is available and not used elsewhere. Above these limits, it will generally be more beneficial to extract further profits as dividends, making use of shareholders’ dividend allowances and basic rate bands, where possible.
Before extracting profits from your company, discuss your optimal profit extraction strategy with us your Cumbrian accountants – Kendal Grange and Ulverston.