As the Arctic Systems case rumbles on, the tax treatment of dividends paid to husbands and wives where one spouse does not undertake a great deal of work for the company remains unresolved. Despite this, there may still be an advantage gained from careful selection of remuneration levels for family members.
Where only a modest salary is needed, the first hurdle is to pay at least the NI lower earnings limit, currently £84 per week. This secures entitlement to state benefits for no payment of any actual NI contributions by either the employer or the employee. Take care however, you may need to comply with the National Minimum Wage requirements and to take account of any occupational pension planning too.
In fact no NI contributions are payable until earnings reach £97 per week (£5,035 per annum). Assuming the person has their full personal tax allowance available (also £5,035) there would be neither a tax nor NI liability on earnings up to £97 per week. Another significant benefit is that once the lower earnings limit is reached (for the full tax year), the low level of earnings counts for additional state pension purposes (State Second Pension) as if it were actually a salary of £12,500 for 2006/07. This is a useful benefit that should not be overlooked in a family business.