Salary versus dividends: your options explained
With the start of a new tax year (April 2013) upon us, salary versus dividends for directors and shareholders is in the spotlight again.
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:
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 £7,696 (in 2013/14) there is no income tax or national insurance liability to pay. Unless there is a compelling reason to do so, there is no reason to take a salary in excess of this amount.
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 £7,696, you will pay no further income tax on a dividend of £30,379 (2013/14). This means you can have a personal tax free income of £38,075.
You need to make sure that the company has sufficient retained profits in the business at the time of dividend payments.
Mixture of both
Just to recap – provided you have no other income and have an annual salary of £7,696, you can take a dividend of £30,378, without paying any income tax. If you want to take more money out than this, dividends will still be the most tax efficient.
Please note, the salary you take is completely your decision. This blog only explains the tax consequences of a the above salary and dividend mix.
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, FreeAgent, 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 paper work!
Free Salary versus Dividends Calculator
We love going the extra mile, so we have created a “Salary versus Dividends Calculator” for our clients to use. We even have other accountants phoning us and asking if they can have a copy of it!
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If you would like to discuss anything covered in this blog, just contact us for a free no obligations chat.