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Salary versus dividends

Salary versus dividends for 2014/15: your options explained

With the start of a new tax year (April 2014) upon us, salary versus dividends for directors and  the new employment allowance of up to £2,000 off your class 1 NICs, the salary versus dividend mix for 2014/15 will change.

salary versus dividends: your options explained

In our experience many accountants have failed to advise on this properly and company owners have missed out on £1,000′s of tax free money.

So, let’s look at these two ways of taking money out of your company:

Salary

As a director you are essentially an employee of the company, but importantly you are exempt from National Minimum Wage (NMW) rules.

Taking a salary saves on corporation tax as it is a fully deductible cost when computing the company’s tax for the year.

However, as you probably know, after a certain amount of salary you have to pay income tax and employer’s and employee’s national insurance (NICs).

However, if you only take a salary of £7956 (in 2014/15) there is no income tax or national insurance liability to pay.

However with the introduction new employment allowance, the tax efficient salary will be £10,000. Why? Because you have to factor in the benefit of paying 12% employee’s NI on the additional  £2,044 ( £10,000-£7956) which will save you  corporation tax of £408.80 ( £2,044 x 20%).

However please do note:

The £2,000 allowance is not per employee but per business and you will still have to pay employee’s national insurance.

This method approximately saves you £162 per year, however each case is different and we suggest you consult your  accountant.

 Dividends

Dividends are a distribution of after corporation tax profits to each shareholder.  Remember, you always get a dividend in proportion to your shareholding.

Dividends attract no national insurance and if your only other income is a salary of £7,956, you will pay no further income tax on a dividend of £30,518 (2014/15).

You need to make sure that the company has sufficient retained profits in the business at the time of dividend payments.

I’m still confused?

If your after the tax saving of £163, then go for the £10,000 salary. If you are looking for simplicity with no monthly or quarterly payment of national insurance to HMRC then go for the £663 per calendar month.

Each circumstance is different, so please consult us if you have any further questions.

How can we help

>>Nimble Jack Accounting ensure that every client gets a salary and dividend tax plan when they join and at the start of each tax year (April).

On top of that, we are FreeAgent friendly accountants, the award winning online accounting software, that all of our clients get free, will let you know how much dividend you can take. It will even automatically create the dividend vouchers and board minutes – this is important legal paperwork!

Just sign up to our newsletter to receive your free copy of the “Salary versus Dividend Calculator”.

Any questions? Speak to one of our friendly accountants on 020 7969 2879.

 

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About Hardeep Mangat

Hardeep is a down to earth accountant, who loves helping contractors, freelancers and small businesses save tax and make more profit. He also has a particular interest in IR35 . Hardeep attended University College London and is a Chartered Certified Accountant, who previously worked for Credit Suisse Investment bank and at a local accountancy practice.

Hardeep on Linkedin and Google+


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