Readers question: I have set up my own catering company at the moment and I am doing the food in a large Irish bar in Edinburgh. I will be paying my employee and buying all the food stock etc. My query is, would I be better off being an employee of my company and paying tax NI as normal with the addition of employer NI, or would I be better to take dividends monthly as my salary, my salary will be £40,000 per annum.
Expert answer: David Tattersall from Handpicked Accountants details the financial differences between operating as a typical company employee with the addition of paying employer NI, or by solely taking dividends.
This is based on the assumption that you are the director and shareholder of your limited company. The cost of the catering is treated as a cost of sales which is allowable for Corporation tax relief, as this cost is wholly and exclusively for business purposes and will generate revenue.
The cost of the employee’s salary will qualify for Corporation Tax relief at 19%. The amount of Corporation Tax payable ultimately depends on the salary, as when a salary is taken, this reduces company profits which in turn reduces the amount of Corporation Tax payable.
As you will be taking a salary of £40,000, you will be in the basic rate tax band. This salary will attract tax at 20%, Employer National insurance at 13.8% and Employee National Insurance at 12% (up to £3,863 per month), and then an additional 2% for any monthly income above this.
Although the company will receive 19% Corporation Tax relief on the salary from a personal tax perspective, it is more tax efficient to take a smaller salary which would typically be equal to the personal allowance. This is the case as you will only pay 7.5% Tax, as opposed to 20% and you will not pay National Insurance.
The rest of the income should be taken as a dividend, but in order to do this, your business should be generating a sufficient amount of profit. You will also be able to utilise the £2,000 dividend allowance.
As the director, the structure of the remuneration will be at your discretion and therefore, the most tax efficient way to extract funds from the company is to take a salary in line with the Primary Threshold (to gain a “stamp” towards the State Pension) and take the rest of the income as dividends.
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