As an owner-manager, your chief concern will be making your business profitable and building up cash reserves in the company. But you’ll want to be able to extract funds from the business too – whether this is via a regular monthly salary, or ad-hoc dividend payments.
Salary vs dividends is the most common split, but there are a number of different ways of extracting funds from your business, all of which can have different tax and capital impacts – both for you personally and for the company as a whole.
Because of this, it’s important to have a clear and workable remuneration strategy – which clearly sets out how and when you will be able to take funds out of the company.
Building a tax-efficient remuneration strategy
Once your business is financially stable, you’ll no doubt have thought about how to take income from the company, particularly how to split income between salary and dividends.
So, what are the main considerations when creating a remuneration strategy?:
- Your first choice is generally to ask ‘How much should I take as a salary?’. Presuming that you don’t have a contract of employment with your company (most owner-managers don’t) then the National Minimum Wage legislation doesn’t apply.
- To build up credits (contribution years) for the state pension, your salary has to be paid at a rate that’s equivalent to at least the Lower Earnings Limit (LEL) of £533/month. Generally, therefore, a salary of at least that amount should be taken.
- Individuals currently pay National Insurance (NI) contributions at a rate of 13.25% on any part of monthly salary between £823 and £4,189, and at 3.25% on salary in excess of that level. From July 2022 no contributions will be paid on the first £1,048 salary per month. Although the total percentage won’t change, from April 2023, 1.25% will be taken off the National Insurance contribution rate, and charged separately as a new Health & Social Care Levy.
- The company will have to pay Class 1a and 1b employer NI contributions at a rate of 15.05% for all salary above £758 per month. But these contributions may be partly or fully covered in some circumstances by the NI employment allowance. Again, from April 2023, 1.25% will be taken off these rates and charged separately as a new Health & Social Care Levy.
- There’s a ‘sweet spot’ between £533 and £823/£1,048 where no NI is payable by the employee, which can be a big factor in the amount of salary you pay out. In this sweet spot you’re actually considered to be a contributor to earn state pension benefits and the salary is deductible against the company’s profits for corporation tax purposes, even though no employee NI contributions are actually paid. Up to £758 per month, no employer’s contributions are due either.
- Above this sweet-spot level, it’s sensible to consider whether or not to take dividends. Bear in mind that dividends can only be paid out of after-tax company profit, so your business does need to have delivered this profit before you can extract any cash as a dividend payment.
- The first £2,000 of dividends are tax-free for the recipient, but above that the rate depends on which tax band the dividends fall into. If you have any unused personal allowances then dividends that fill that gap are tax-free.
- Dividends in the basic-rate band (generally total income between £12,570 and £50,270) are taxed at 8.75%. Dividends in the higher-rate band are taxed at 33.75% and anything above that is taxed at 39.35%.
- Other ways in which funds can be extracted from the company include paying off amounts due on any director’s loan account, making a loan to you as a director (which can have other consequences), making contributions to your director’s pension fund and providing benefits in kind.
- As with all of these things, the driver behind your remuneration strategy needs to be the needs of the business, not the short-term, positive tax implications for you personally. There will always be specific considerations to factor in for each scenario and each individual – so it’s good practice to talk to your accountant in advance of extracting any funds from the business.
Talk to us about your remuneration strategy
In most cases, there’s no shortcut to crunching the numbers when it comes to creating a robust remuneration strategy. It requires an excellent understanding of both company and personal tax, and a good knowledge of the complex (and sometimes opposing) effects that company and personal taxes can have on each other.
We’ll help you to review your business and private wealth situations and generate a remuneration strategy that’s tax-efficient, straightforward and well-suited to your cash needs.
Get in touch to talk through your remuneration plans.
SG TEST
Once you’ve sold your business and have received the funds from the sale, you’re then faced with a big question: what happens next?
After guiding the helm of your company, it will be tough to let go. But if the circumstances are right, there’s no reason why exiting the business should be a sad occasion. You’ve built a stable business and personal legacy. You’ve employed a team of talented people and helped them drive their careers. And you’ve brought your products and/or services to a satisfied and loyal customer base.
So, how will you now focus your time and effort? Let’s look at your options…
Retire and live out the entrepreneur’s dream
After many years of hard work, worries and stress, the thought of a business-free lifestyle may well be appealing. But retirement isn’t for everyone. If you have thrived on the pressure, challenges and excitement of being the captain of your business ship, retiring may seem like a step away from the action.
On the flipside, the allure of a more relaxed lifestyle may be strong. With the proceeds from your sale, you should be in a position to make you, your family and those around you very comfortable. It may be that the entrepreneur’s dream of building a business, selling up and retiring to a hot climate is your idea of perfection.
Stay involved in the business
Even though you don’t own the business anymore, it doesn’t mean you have to step away completely from the company. You could remain involved in the business in some capacity, allowing you to ‘keep your hand in’ and support the future course of the business.
For example, you could become:
- A joint partner in the business – you could sell a part share in the business and work as a joint partner with your new investor. This allows you to free up some capital, while maintaining an element of control and influence.
- An external adviser or consultant – you could advise the new owner and their board as an outside adviser. After all, who knows this business better than you? Becoming a consultant could well be an astute move and keeps you in the loop with the future path of the business – while charging out a consultancy fee as an added benefit.
- A non-executive director (NED) – you could join the board as a NED and use your personal experience to help guide and support the new owner and their board. If that’s the route you choose, it’s a good idea to retain some shares in the business, so you have a vested interest in the company’s performance and your own share value.
- An informal adviser to your family – if you’re handing the business down to the next generation of your family, they will almost certainly want your advice. You’ve been through the ups and downs of setting up the business, so you’re in the best position to give your family the guidance and tips they need to run a smooth operation.
Set up a new business
With so much experience behind you, it could be that you’re itching to start the whole business cycle again. If you’ve got the ideas, the capital and the motivation to start another new business, this can be a new and rewarding challenge to get your teeth into.
First time around, you’ll have been a little green and less aware of the many pitfalls of founding a new business. You’re now better prepared and more knowledgeable about what’s required from a founder and business leader. We learn plenty from our mistakes, so you’re in a great position to return to the business cycle again with a new idea.
As with any new businesses venture:
- Make sure you have a detailed breakdown of your business idea
- Write an in-depth business plan that maps out your journey
- Ensure you have the funding to get this idea off the ground
- Be prepared for a period of hard work and lower income before the company takes off.
Do your bit for charity and your community
We all have interests and causes that are close to our heart, so supporting charities and community projects in these areas is a great way to use your money for long-term good.
Donating money to your chosen charity or social enterprise is also a triple whammy:
- You get to provide funding to causes that are close to your heart
- You can be philanthropic and help people who are in challenging situations
- You get the positive impact of tax breaks for donating to charity.
You also have the option of putting your own time into working with these charitable causes. You can use your expertise and experience to guide them, help with fundraising or provide hands-on support at events, community projects or lobbying the Government for greater support.
The end of the road, or a new chapter?
Once the business is sold and you close your office door for the last time, you take a step into the unknown. But with so many varied and valuable options to choose from, your life post-exit need never be boring or predictable.
The potential is there for an exciting new venture, or the pleasure of relaxing in the sunshine by the pool. It’s up to you to define the next chapter in your life and your business career.
If you’re thinking about exiting your business, please do get in touch. We’ll help you plan your exit strategy, add value pre-sale and choose the best options for your personal future.
Talk to us about your next step.
Ascentant Accountancy are based in Derby (01332 981920, info@ascentant.co.uk) and Ripley, Derbyshire (01773 424009, Ripley@ascentant.co.uk), call us to see how we can assist.
