Welcome to our second tax tip on remuneration planning, which follows on nicely from yesterday’s email about trading structure.

How tax efficient is your remuneration planning?

Remuneration planning is about using the most tax efficient ways to get money out of your business and covers more than just the way in which you pay your monthly salary (although that is a significant part of it). The majority of tax-saving opportunities in remuneration planning relate to directors of limited companies, however, the Marriage Allowance and pension contributions, both covered in this email, offer tax-saving opportunities for sole-traders as well.

Things to consider for remuneration planning with maximum tax efficiency.

1. Pay yourself tax-efficiently

As mentioned in the previous email, the most tax efficient way to pay yourself through your Limited company is via a small salary and the rest in dividends. See the example of this payment structure with figures below.

Lower salary – High dividends

Pay yourself a salary of £1,041.67 per month, this will;

  • Utilise your tax-free allowance
  • Minimise National Insurance liability whilst still protecting entitlement to state benefits

Take the rest in dividends – Dividends are the allocation of a company’s profits to its shareholders and for the 2024/25 tax year are taxed at the rates shown below.

Thresholds 2024/25 Dividend Tax Rate 2024/25
Personal Allowance: no tax paid on income in this band. £0 to £12,570 0%
Basic-rate tax payers £12,570 to £50,270 8.75% on dividends earned above dividend allowance.
Higher-rate taxpayers £50,270 to £125,140 33.75%
Additional-rate taxpayers £125,140 upwards 39.35%

2. Income Splitting

Is your spouse/partner or even your son/daughter currently not working or working part-time, but often helping you out with general business related administrative tasks or answering the telephone for you?

If you can answer “yes” to this question then you can make that relationship more formal by adding them to the business and take advantage of their tax free personal allowance or lower rate tax band in order to reduce the family tax bill.

A typical scenario might be where the managing director of a business has a spouse who is a stay at home mum/dad. They are not currently employed but they do make an active contribution to the business in the ways mentioned above. By formalising that relationship and making the spouse a director of the business, dividends that would have attracted the higher rate of tax if they had been paid to the business owner, can be paid to his spouse as a small salary and dividends, thus minimising the income tax that the household pays as a whole and as a result maximising income.

3. Marriage Allowance

Are you married or in a civil partnership?

Marriage allowance allows you to transfer up to £1,260 of your personal allowance to your husband, wife or civil partner if they earn more than you. This will effectively reduce the income tax payable by up to £252 per year. If you apply for marriage allowance and you are successful, changes to your personal allowance will be back dated to the beginning of that tax year (6 April). You can also do a back dated claim for up to 4 previous tax years.

Who is eligible?

In order to be eligible to pass £1,260 of your Personal Allowance to your higher earning husband, wife or civil partner, you must fulfil each of the following criteria

  1. You must either be married or in a civil partnership
  2. You must either not be earning or earn less than £12,570 per annum.
  3. Your partner’s income must be between £12,570 and £50,270 ie. a basic 20% rate tax payer, couples where one partner is a higher or additional rate tax payer are not eligible for this allowance.
  4. Both of you must be born on or after 6 April 1935, if not there is another allowance called the Married Couples Allowance that would work better for you.

Marriage Allowance can still be applied for if either you or your partner are currently receiving a pension or living abroad. As long as you get a Personal Allowance from the UK tax administration (HMRC) you are eligible to apply.

How will our Personal Allowances change?

If your application is successful, HMRC will either change the higher earner’s tax code if they are employed or apply the extra allowance they receive their Self-Assessment tax return.

If you are either employed or receiving a pension, then your tax code will also change to reflect the reduction in your Personal Allowance and will end with ‘N’.

A proportion of your Personal Allowance will then automatically transfer to your partner every year until you either cancel Marriage Allowance because your own income increases sufficiently that Marriage Allowance is no-longer viable or your partnership circumstances chance due to death or divorce.

How do we apply?

It is very simple to apply and only takes a few minutes. You can apply for Marriage Allowance online (link to marriage allowance page on HMRC website).

4. Pension Contributions

One of the most tax-efficient things you can do is make a pension contribution. A pension contribution is a bit like additional tax-free salary, only you can’t get your hands on the money immediately.

As a sole-trader, you can gain tax relief on payments into a pension but these amounts can be quite restricted depending on your level of income. The annual allowance for pension contributions will be £60,000 for 2024/25. However, this will be reduced proportionally for individuals with an income in excess of £200,000. For those with earnings of £260,000 or more, the annual allowance will be limited to £10,000.  For an individual where income is below the higher rate tax threshold there is a tax benefit but this is added to your pension contribution by way of grossing up the contribution and the tax benefit is currently somewhat hidden in the current year as it sits in your pension fund.

As a director of a limited company, the rules can be more generous, the company may pay a contribution into your pension of up to £60,000 per tax year (based on 2024/25 rates) and more in some cases where there has been little by way of pension contributions in the preceding years. Company pension contributions will generally be an allowable cost for corporation tax purposes but HMRC do look at the combination of salary and company pension contributions to ensure the total ‘remuneration’ is not excessive.

We hope you have found these tax-saving tips interesting and informative. If you have any questions or would like further information about remuneration planning, please contact Trinity on 02475 185286 or complete our online form.

Don’t forget to keep an eye out for the next tax saving tip which will be heading for your inbox tomorrow!