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Prudential: Run for cover

Technical update for Financial Advisers and Paraplanners

4 Dec 2017

Prudential: Run for cover

For many small businesses surplus cash is a nice problem to have. Or more precisely, what to do with that cash sitting on the Balance Sheet which is surplus to business needs - cash which is surplus to normal working capital requirements. Graeme Robb, Senior Technical Manager at Prudential explores some options.

In the owner managed business world it's often seen as a binary choice - salary or dividend. It's fitting therefore that the tax impact of each can also be summarised in simple terms.

Let's look firstly at salary/bonus.

This remuneration is generally deductible from trading profits as long as it's paid wholly and exclusively for the purpose of the trade. It would be a rare occurrence for HMRC to challenge a director's remuneration. These amounts are then subject to income tax. In her article, Liz Hardie explores how this income falls into the first ‘slice’ in the personal tax computation. With respect to National Insurance (NI), employers are currently charged at 13.8% for earnings above £157 per week. Employee's NI of 12% is due on weekly earnings between £157 to £866 and then 2% thereafter.

What about dividends? There will be no Corporation Tax relief as dividends are paid out of after tax profits. There will be no NI implications as dividends are taxed as unearned income. With regard to personal tax, in 2017/18 the rates of tax above the £5,000 dividend nil-rate are 7.5% for dividends in the basic rate band, 32.5% for dividends in the higher rate band and 38.1% for dividends in the additional rate band. The dividend 'allowance' will almost certainly be reduced to just £2,000 in 2018/19.

The key is finding a blend providing the greatest net benefit with sufficient immediate funds to address any expenditure needs. What about future funds though? Don't forget the missing ingredient of a pension contribution.

Read the full article here.

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