Dividends vs salary
Most shareholder/directors take money out of their company as a mixture of director’s salary and shareholder’s dividends. There is no rule on how these should be split and we often advise on the most tax efficient way of doing so.
Pros of taking more salary
- Salary and employer’s national insurance are a business expense and can reduce your corporation tax bill. (Current rate 19%)
- Salary can trigger rights to state benefits such as sick pay, maternity/paternity pay, pensions and redundancy payments
- Dividends can only be paid out of profits so, sometimes, it may be more appropriate to make payments as salary
- During the current pandemic government support has been given only on salaries. This means that many directors feel that they lost out on financial support, however many were unable to furlough themselves as they needed to keep working for the company to survive.
- Initially mortgage brokers base their calculations on salary although most are now comfortable dealing with owner managed businesses.
- Dividends do not count as pensionable earnings however many business owners receive a company salary.
- Companies which fall under IR35 may be taxed on dividends as if they were employment income.
Pros of taking more dividends
- There is no national insurance payable on dividends so these are usually more tax efficient. Taxation of dividends has changed over the last few years so there are not significant tax benefits until profit is £25,000 per director/shareholder.
- Dividends are taxed on the individual at a lower rate than salary to reflect the fact that corporation tax has already been paid
- HMRC may disallow salary where a director/shareholder is not actually working in the company.
We are always happy to advise you on the best balance for your personal circumstance and also to consider pensions, home office rental and benefits in kind that might be appropriate for you.