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.
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.