Tax Relief Strategies - Structuring Dividends and Salaries, PART 2

Tax Relief Strategies for UK Limited Companies - 2/3 

Optimising your tax liabilities

Understanding the complex world of tax relief can be a difficult and challenging process for many UK limited companies. But there is good news! There are enormous savings to be made  … if only you know how!

There are so many opportunities with tax relief – far too many to deal with in one blog. So, we've covered the key principles in a series of three blogs. In our first blog, we explored how to Claim Capital Allowances This blog will be about Structuring Dividends and Salaries Efficiently. The last of the three will be about the Employer Pension Contributions.

The three blogs will, between them, outline three of the most effective tax relief strategies.

Big tax savings are just around the corner!

Announcing the Liondaris Tax strategy planning service 

We’d hate you to miss out on these vital potential savings. So - we’re announcing the new and unique tax strategy planning service. This will help you make the most of your tax-saving opportunities well before the end of the financial year. 

Strategy 2 -  Structuring Dividends and Salaries Efficiently

Capital allowances let you write off the cost of certain assets against your taxable profits – a great way to reduce your overall tax bill. This is a crucial area for limited companies to be looking at. Let’s look at three different types of allowance -

Dividends vs Salaries

Choosing the right mix of dividends and salaries is essential for tax efficiency.

Tax Rates
Dividends are generally taxed at a lower rate compared to salaries. While salaries are subject to Income Tax and National Insurance Contributions (NICs), dividends are only subject to Dividend Tax, which can result in significant tax savings.

Tax-Free Allowances
Take advantage of tax-free allowances such as the Personal Allowance and the Dividend Allowance. The Personal Allowance allows you to earn up to £12,570 (as of the current tax year) tax-free, while the Dividend Allowance offers a further £2,000 tax-free on dividend income.

Balance Strategy
By maintaining a balance between salary and dividends, you can minimise overall tax liability. For instance, taking a modest salary up to the NICs threshold and the rest as dividends can reduce both Income Tax and NICs.

Pension Contributions

Employer pension contributions offer a tax-efficient way to reward employees and directors while reducing taxable profits – more on this in this blog <link to Blog 3 one employer pension contributions>.

Tax-Deductible
Contributions made by the employer to an employee's pension scheme are tax-deductible expenses, reducing the company's taxable profits.

NICs Savings
Employer pension contributions are exempt from NICs, making it a more tax-efficient way to provide for employees' futures compared to salary increases.

Annual Allowance
Ensure contributions are within the annual allowance limit (currently £40,000 per individual) to avoid tax charges on excess contributions.

Bonus Payments

If you get the timing right with bonus payments, you can spread out tax liabilities and maximise tax efficiency. Here's a little more detail -

Timing
The tax year in which a bonus is paid can significantly impact tax liabilities. Consider paying bonuses in a year when profits are higher to utilise allowances and reliefs more effectively.

Deferred Bonuses
Deferring bonuses to a later tax year can help spread tax liabilities and take advantage of changing tax rates or allowances.

Tax-Free Bonuses
Consider offering tax-free bonuses such as childcare vouchers, which can provide additional benefits to employees without increasing tax burdens.

How all this might work in practice

Here's an example - Let's say you're the director of a limited company. You might draw a salary just up to the National Insurance threshold (currently £9,568) and take the rest of your income as dividends.

This strategy minimises your NICs liability while taking advantage of lower dividend tax rates. Also, if you make a pension contribution of £10,000 as an employer's contribution, this can further reduce your taxable profits while providing future benefits.

Save yourself ‘£000s in tax this year

Efficiently structuring dividends and salaries requires careful planning and a good understanding of tax regulations. 

With our new tax strategy planning service we'll provide personalised advice and strategies tailored to your specific financial situation. By balancing dividends and salaries, making strategic pension contributions, and timing bonus payments wisely, you'll significantly reduce your tax liabilities. We'll work with you to make sure you retain more of your hard-earned profits.

Get in touch today. Find out more about maximising your tax savings.