For all of our limited company directors and shareholders, a key concern is how they should pay themselves from their Limited Companies. The answer in some cases is straight forward, in other cases not so. Fluctuating tax rates mean that the ideal mix of salary and dividend can change year on year, but don’t worry because we’re here to help with what works best for you and your business.
In the majority of cases a salary up to the personal allowance limit of £12,570 is preferable, since there is no PAYE or employees National Insurance up to this level for most people. This level of salary can attract Employers National Insurance (ERS NI) at 15% (on salary above £5k). Both the salary and the ERS NI are corporation tax deductible, saving tax for the company at 19-25%.
Typically, a £12,570 salary would be paired with dividends declared by the company to the shareholder. The first £500 of dividends are tax free to the individual. Beyond this, dividends are taxed on the individual at the rate that applies to them personally. Basic rate dividends are taxed at 8.75% (personal income up to £50,270), whilst higher rate tax payers will pay 33.75% personal tax between £50,270 and £100,000. There is no tax relief in the company on dividends since these are paid to shareholder out of company reserves, after tax.
Overall, the dividend rates of tax paired with ‘minimal’ salary as noted above will, in most cases reduce the overall tax bill for the individual and the company combined. However, as each business is different, and each individual has different circumstances, this is not a ‘one size fits all’ approach.
The following are key considerations that all need to be taken into account:
Age
If you are above pensionable age, you wouldn’t usually pay any NI of your salary, making this potentially a more tax efficient route.
Other Income
Pension income/rental income/Interest income etc will be affected by the amount you draw from your company; this can alter the ideal approach for you. If you have other employment, then you may have already used your personal allowance and be put on a new tax code.
Individual Circumstance
Do you need the cash now or can it wait? If you’re salaried, your taxes will be deducted at source, whereas dividends are taxed later via self-assessment.
Company Reserves
Does your company have sufficient retained profits in order to pay a dividend? If it doesn’t, you can’t legally declare a dividend and would have to choose salary payment instead.
Number of Employees
The number of employees affects the tax relief available for Employers NI (First £10,500pa is tax free). If you are a single director payroll, you can’t claim this relief, if your Employers NI bill is already more than this then this will not be available to you.
National Insurance Credits
If you pay yourself a salary above £6,396 you will automatically qualify for NI credits, which will qualify you for Pension credits for that tax year.
Company Structure
When declaring dividends the company needs to take into account all shareholders, dependant on their number and class of shares. Does the level of dividends suit everyone?
R&D
If your company is a research and development heavy business then you may be better paying yourself a salary, since this can qualify for R&D tax relief, whereas dividends can’t.
Overall, as you can see there are lots of considerations when choosing salary or dividends as a small business owner. Please get in touch with the Rogers Spencer team via the contact details below for specialist advice on this for you and your business.
📞 0115 960 8412
📧 advice@rogers-spencer.co.uk
Robin Maxwell
Robin MaxwellRobin Maxwell is a partner of Rogers Spencer and has been working with us since 2003. Robin specialises in Accountancy Solutions, Audits and Tax and VAT. Find out more about Robin here.