Corporation tax relief is a significant aspect of financial planning for businesses, particularly when it comes to salaries. However, it's crucial to understand that not all forms of remuneration qualify for this relief. For instance, dividends, which come out of pre-tax profits, do not qualify for corporation tax relief.
In Tax Efficient Profit Extraction, Carl Bayley looked at the taxes to be considered, together with the relevant reliefs, exemptions, and thresholds.
One common misconception is that salaries always get corporation tax relief. In reality, the situation is more nuanced. The term 'always' is seldom used in tax matters as there are nearly always exceptions to every rule.
A key factor in determining whether a salary qualifies for corporation tax relief is its justification based on the duties performed by the director. The level of remuneration must align with the work the director puts into the company. For example, if a company is making a profit of £80,000 and the director's remuneration package totals £72,000, and the director is the sole driving force behind the company's success, then this level of remuneration could be justified.
However, it's important to note that the remuneration package isn't limited to the salary alone. Other elements, such as pension contributions, also come into play. A tax-efficient profit extraction strategy might include a salary of £12,570 and a £1,000 pension contribution. The entire package needs to be justified by the work the director does.
While justifying the director's salary is rarely a problem, complications can arise when family members are paid from the company's profits. The same principles apply - the remuneration must be justified by the work performed.
Moreover, the salary levels we typically discuss, such as £9,100 or £12,570, can be easily justified even if the director's duties only extend to attending board meetings. However, when the remuneration package exceeds these amounts, it becomes necessary to justify the increase based on the director's responsibilities and the work performed.
Corporation tax relief for salaries is not a given; it depends on various factors, including the justification of the remuneration based on the director's duties. It's essential to consider these aspects when planning your company's financial strategy to ensure you're making the most of the available tax reliefs.
To watch the full session, please click here. In this course, Carl Bayley covers:
- The taxes to be considered, together with the relevant reliefs, exemptions, and thresholds
- Simple ‘salary versus dividend’ strategies to provide the most tax-efficient outcome in the majority of cases
- The SIX circumstances where salaries greater than the personal allowance are more tax-efficient
- Paying spouses, partners, and other family members
- Better alternatives to dividends: rent, interest, and pension contributions
- Using directors’ loan accounts tax efficiently
The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article.
