How it works
One of the most efficient methods of reducing a company’s tax bill and increasing the amount of cash withdrawn at the same time is by paying a salary to a member of the directors’ family. Such members can be the director’s spouse/ civil partner or children at university for example.
How much to pay
In order to qualify as a deduction against the company’s tax on its profits, the family member needs to be ‘really’ earning the amount that is paid to them.
- The amount paid must be in return for the work they undertake. If no work or little work is undertaken then HMRC could refuse the company a tax deduction and treat the payment as a distribution to the director.
- Paying a spouse or civil partner say, £50,000 a year for one days’ work a week might possibly be challenged by HMRC and if upheld would result in the expense being disallowed as not being incurred ‘wholly and exclusively.
- The salary must be reasonable for the work undertaken – a salary greater than would be paid to another non-family member to do the work could be investigated by HMRC.
- By appointing the family member as a director a small salary could be paid, even if the actual work undertaken is little.
- Optimal’ salary amount, namely that although NIC is not payable by the employee on £9,568, the employer is liable for NIC of an amount in excess of £8,840 (i.e. £100.46).
- Corporation tax relief is available at 19% on the whole amount of salary plus employer’s NIC then the corporation tax deduction outweighs the amount of NIC due such that for 2021/22
- The salary should be paid into the family member’s personal bank account and be recorded in the accounts as payment to another employee; the company will also need to comply with the Real-Time Information requirements of a payroll scheme.
- Should the family member also be a shareholder there will also be the option of withdrawing more from the company if needs be.