Salary can be cheaper than dividends for those over state retirement age

January 31, 2019|In KRW Tax Tips|By Keith Witchell

Regular readers will know that the combination of a low salary and dividends is usually the most tax efficient way for a Director/shareholder to be paid by their company.

Even after the introduction of the new dividend tax in 2016, dividends still work out cheaper than taking a higher salary for business owners. While the tax saving has diminished since 2016, the NIC saving still makes dividends the most tax efficient option.

But what if the Director is over the state retirement age, and therefore no longer pays employees National Insurance? Believe it or not, dividends are still usually cheaper since Employers NIC (at 13.8%) continues to be payable by the company, regardless of age.

However, if the company qualifies for the employment allowance (which covers the first £3k per annum of Employers NIC) and is not fully using this for other staff, then salary can work out better.

To qualify for the employment allowance the company must (since 2016) employ at least two people that are paid over the NIC threshold. But assuming that’s the case then a higher salary for the Director will incur no employees or employers NIC (until the employment allowance is fully utilised) and the Director will simply face 20% tax (depending on other income) on the extra salary. The company will save 19% Corporation Tax on the higher salary, which gives a net 1% tax cost to the extra salary, vs 7.5% tax on dividends above the £2,000 dividend allowance.

Let’s take the example of a small company with a Director/shareholder over the state retirement age, which also employs a part-time employee on a salary of £9,000 per annum, but has no other members of staff. In the 2018/19 tax year the employers NIC on the part-timer only uses £79 of the £3,000 employment allowance. This means that the Director could be paid a salary of £29,500 per annum without incurring any NIC. Providing the Director also takes dividends of at least £2,000 per annum (to utilise the dividend allowance) and their other sources of income (i.e., state pension etc) don’t take them over the higher rate tax threshold, then this will be the most tax efficient solution.

Key Facts

  • A low salary plus dividends is the most efficient way for most Director/shareholders to be paid
  • This is because 12% employees NI and 13.8% employers NI applies to salary over the NI threshold
  • Those over state retirement age no longer pay employees NI, but employers NI continues
  • But if the £3k pa employment allowance is available a higher salary will usually work out better

For further advice on this matter, please contact me.

Keith Witchell