Historically, tax planning for small businesses centred on declaring larger shared dividends and taking a lower salary; this reduced the amount of tax and NI payable. Two pieces of legislation (Income shifting and IR35 – see guides) have tried to stop this type of planning. It's worth understanding the basic principles:
Splitting share ownership (dividends) with a spouse – this resulted in the lower tax bands of both partners being used before any income would become taxable at the higher rate. Joint share ownership is no longer advisable because of Section 660 and income shifting legislation.
Avoiding NI payable on salary by paying more as dividend – There is no NI payable on dividends. The combined personal tax and corporation tax on dividends is higher than the income tax owed on salaries; however, the overall advantages of dividend often equates to around 11% of total overall income. IR35, where it applies, dictates how salary is calculated. The formula results in most of the business income (after expenses) being treated as salary rather that dividend and therefore full NI being paid.