The basic principles of tax planning

I have two basic principles when it comes to tax planning:

  1. Figure out your priority for the planning
  2. Start with the simplest option and work your way up in complexity
What is your priority for the tax planning?

The first of these rules is more in depth than you think. Whilst tax planning has the aim of saving the most tax, there are many things to consider. For example, what may save you tax now, may cost you more in the future. Or, in the area we are looking today, you could structure salaries and dividends so that you save the most amount of tax overall, however it doesn’t give business owners the best net pay.

As I’ll explain in a minute, to optimise tax efficiency without a practical goal could mean saving tax and leaving money saved trapped in a limited company.

Is your tax planning driven by a need to maximise personal income? Or is your tax planning about retaining cash in your business structure for future purposes.

Complexity

I have seen many times where professionals (not just accountants) have proposed wonderful and complex structures for trading, drawing income or making investments but as brilliant as these plans are, they rely on something fundamental: can they be practically applied?

If the planning isn’t followed up by sound administration including filing the right forms and ticking the right boxes, or even as fundamental as making the right transactions from the bank (are dividends payments called “Dividends” and Salary called “Salary”, when they are paid?) then, without this nice audit trail, the house of cards of this planning can come crashing down when nudged by an HMRC inspector.

I therefore try to approach this by finding the simplest way of meeting the priorities of you and your business first and investigate the pros and cons. If there are big enough flaws, then I’ll increase the complexity and go through that process again. This way you always end up with a tested, but also as simple to implement as possible, plan.

Plans must also be tailored to the financial abilities of the business owner and whether it’ll work on a practical level for your business. Good cash management, bookkeeping and paperwork is a must!

As you can see, there’s a lot involved in good tax planning!

Recommended Salaries and Dividends for 2022/23

I realise that was a long pre-amble to get to what you came here for, but it is important to explain that as the tax system only ever increases in complexity, the more tailored advice will need to take precedence of “standard advice”.

The biggest issues in planning for directors’ salaries is that the National Insurance (NI) bands are still not aligned.

Employer’s NI is payable when an employee’s salary exceeds £175 per week / £758 per month. This rate is not changing and effectively marks the limit for our standard advise for salary and dividends planning for our clients.

Between April 2022 and June 2022, the Employee’s NI is payable (by the employee) when income exceeds £190 per week / £823 per month. This is going to increase from July 2022 to c£241 per week / £1,047 per month (these exact figures are yet to be published – HMRC guidance still shows old data from 7 February 2022 at the time of writing).

The annualised new Employee’s NI banding isn’t going to be the £12,570 that Rishi Sunak announced, instead it will be pro-rated for this coming tax year. Meaning the maximum an employee can earn for the year without any employers NI is £11,908. Please note however that on this level of income there is still Employers NI to pay.

This creates some complexity, but we have tried to put some options, as simply as possible, below.

Basic Income Planning

We are recommending £758 per month salary
Why? Because there is no Employers NI at this level

This option is best suited to companies who do not want to pay NI to HMRC each month (usually where the director is the only employee of the business.) It would also suit companies where salaries are paid to non-director shareholders to keep drawings in parity between the owners.

Monthly drawings 
Salary£758.00
Dividend£3,431.00
Total Drawings£4,189.00
Annual income impact
Annual Salary and Dividends £50,268.00
Less: Personal Tax Payable £3,149.83
Net Income £47,144.43

With this option drawings remain the same throughout the year and there is no monthly PAYE or National Insurance to pay for the salary.

Remember: Dividends have to be paid in accordance with the share structure. For example, if two people own 50 shares each of a company that has 100 shares both shareholders have to be paid the same amount of dividends.

Generally, I would advise that to structure drawings with a salary higher than the above recommendation or to review efficient tax planning for where your taxable income exceeds the basic rate band specific and tailored advice will be needed.

A point that is helpful for some is that the Lower Earnings Limit, the point at which you get your “Stamp” for State Pension, is remaining at £123 per week / £533 per month. This basically means the minimum salary required to keep your “qualifying year” for state pension is £533 per month.

Only Primary Threshold (the point at which Employee’s NI starts to be deducted) and Lower Primary Limited (same point but for self-employed) are changing.

If you have any questions or would like your income tax planning reviewed, then please get in touch with your Client Manager or Principal Adviser or email enquiries@a4g-llp.co.uk and we can help.

Contact me today!

Josh Curties

BA (Hons) FCA

Partner & Principal Adviser

01474 853856

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