Small limited company tax efficiency query

[lessbutbetter]

Hi and thanks for reading my question.

I run a small limited company and draw the maximum £8k ish salary to keep me under the NI threshold plus £2000 tax free dividends x 3 (spouse and daughter are also directors). All remaining profit is paid into my pension monthly + one-off lump sums.

I've recently dropped a large client and the available profit going forward isn't going to be enough to continue paying the company pension contribution at the same level if I keep taking the maximum tax free salary + dividends.

I don't need all the salary + dividends for day to day expenses and just take the maximum out as it's tax free and thought I should. The main aim of running my business is to fund my future pension, which I was on track to be able to take in 18 month's time.

Ideally I'd like to keep my pension contribution as it is, or even increase it, but I'm not sure if I'm being inefficient by not making the most of the tax free salary + dividends.

What to do...

Thanks in advance.

 

[TruemanBrown]

Given that there are three directors so you could have claimed the employers allowance.

This means that the optimal salary, if personal allowances had not been used elsewhere, would have been a salary equal to the personal allowance. You would have had a small national insurance liability, but this would have been outweighed by the Corporation Tax relief you would have obtained on the increased salary.

Basically, you have to make a choice between the optimal tax position or improving the worth of your pension.