Whilst remuneration for employees is a key aspect for attracting and retaining talent within the business, there should also be a remuneration plan in place for director-shareholders and members of an LLP.
The strategy requires accurate forecasting, cashflow and WIP management to ensure calculations are being made on accurate and relevant figures, and that the funds are in place to make the necessary payments.
In all scenarios there is a balance between the needs of individuals and the needs of the business. This can be particularly challenging in an LLP as tax is paid by the members on the profits made, but then they may need to leave cash in the business.
Tax efficient profit extraction for architects:
Director – shareholders:
- Salary should be paid up to the national insurance band as it means no NI is payable and the salary is tax allowable in the company.
- Dividends are preferential to salary from a personal tax perspective.
- The opportunity for interest income should be explored, potentially making use of the personal savings allowance. No national insurance is due on interest payments and the company will obtain a corporation tax deduction for the gross interest paid. Care needs to be taken to ensure 20% income tax is withheld by the company and paid to HMRC via a CT61 return.
- Pension contributions can be made for directors, typically receiving corporation tax relief in the process. There are no national insurance implications for either the company or the directors and there is no taxable benefit for the directors of the contributions being made by the company into personal pensions, as long as the £40,000 (or lower if tapered for high earners) annual allowance is not exceeded. If £40,000 is breached, the individual will be subject to a tax charge at their marginal rate.
- Research and development should also be considered. Wages and salaries can contribute a significant amount of qualifying R&D expenditure, whereas dividends cannot be included. As a result, consideration should be given as to the level of salary and dividends taken by those who perform R&D activities as greater efficiencies may be gained from taking a salary.
Members of an LLP:
- Members of an LLP are taxed on their share of profits generated by the partnership at income tax rates. Dividends are therefore not an option for members of an LLP.
- Tax payments should be budgeted for and some LLPs may find it appropriate to operate a tax withholding arrangement to retain sufficient funds to pay the members’ tax bills.
- Members are liable to CGT on their share of realised gains made by the LLP.
- Having a flexible remuneration policy is often appropriate to reflect the performance of different members who may have the same share of the LLP.
- Bespoke remuneration strategies are often required depending on a practice’s profitability, shareholding or membership structure, rewarding of contributions to profit and other factors.
- We can assist in the building of a bespoke strategy which combines many of the factors mentioned above and fairly remunerates the relevant partners, considering the incentivisation in place to increase profitability and reduce the risk in a business.