Tax Planning: Salary vs Dividends?

You don’t need to be a Tax Accountant to know that the Salary vs Dividends question has been dramatically altered recently by Corporation Tax and National Insurance changes.  The question is not about whether to pay yourself salary or dividends but when to pay them and how much. With other options available such as Director Loans paving the way to make massive tax savings through the timing and structure of directors pay, it is worth informing yourself before you storm your Accountant’s office demanding to know how he or she is going to save you that £15,000 or £50,000 tax bill.  An ethical question for some as it can be construed as tax dodging, but if you are looking to minimise your business’s and your own tax bill, here are some initial aspects for you to consider to help inform yourself. Don’t forget though, Government Budgets have a habit of moving the goal posts, so make sure you KEEP up to date:

1. Look at paying a bonus that does not take the Director in to a new tax band

2. Reduce Corporation Tax with salaries and bonuses that usually attract Corporation Tax relief (dividends do not) so , if the company pays salary or bonus, its taxable profits will be reduced and it will pay less Corporation Tax

3 Know the difference in personal rates of Income Tax on Salary and Dividends – Directgov has a useful site:

Dividend income (2010-11)                                   Div Tax      Income Tax

at or below the £37,400 basic rate tax limit                10%                        20%

at or below the £150,000 higher rate tax limit           32.5%                    40%

above the higher rate tax limit                                           42.5%                    50%

4. Make a Director’s Loan and receive Payment From Director Loan Account

Remember Dividends are paid out of profits after corporation tax has been paid so Dividends never reduce the tax liability of the business. If you do plan to take dividends rather than salary, make sure those plans are within HMRC tolerances.

Individual Tax burdens vary, and you should also be looking to retain company funds in order to enhance capital growth.

If you want to talk about this in more detail, please do call us and we will be happy to help in the first instance and then suggest you confirm your decisions with our specialist Tax Accountant partners.

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~ by crispinread on March 10, 2011.

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