When you’re running a small business, it’s all too easy to end up paying more tax than you actually need. One of the problems, of course, is that you’re very much focused on the day-to-day priorities of the company and ensuring its success. And if your enterprise is a family concern, with joint ownership between a husband and wife, even keeping up with your cashbook accounting and VAT can sometimes be a challenge if you’re pressured for time and worrying about securing the next sale.
It’s definitely worth creating a space to talk to your accountant about remuneration planning, however. Some very straightforward steps can help to minimise your liabilities and get the most out of the business you’re trying to grow.
An example might be a company in which a husband and wife are both paying themselves significant salaries. Perhaps one partner is a director on £75,000, while the other takes home a pay cheque of, say, £26k. In this scenario, two problems arise straight away. The first is the high level of PAYE and National Insurance within the company and the second is an unnecessary burden of extra personal tax. The spouse on the lower salary is not using up their basic rate band, while the higher earner finds themselves in the higher-rate tax bracket.
The solution here might be to reduce both salaries to the level at which no national insurance is due and for the two business owners to both take dividends up to their basic rate bands instead. Rather than a 20% levy on the £26k salary, there would be a 10% tax on dividends under the basic-rate band. The director, meanwhile, would end up paying less tax on their dividends than they did via PAYE.
This strategy would provide a significant additional joint net income of approximately £19k a year to the director and their partner, while the cost to the company would remain the same.
If you’re in any doubt about whether your own affairs are arranged in the most efficient way, then a conversation with your professional adviser is the first starting point. A small amount of planning can potentially reap a big reward.