Is it best to take a salary or a dividend? When can I pay myself a dividend? How shall I pay myself!?
We regularly meet business owners and directors who are confused about how to extract money from their business.
Whether you’re the director of a start-up, scale-up or fully established business, you’ll want to have confidence that you’re paying yourself in the most tax-efficient way.
In just 600 words, we will attempt to give some insight into the remuneration strategies that company directors can employ to ensure the most tax-efficient remuneration package for themselves.
Take a salary through Pay As You Earn (PAYE)
In order to pay yourself a regular income from the business, you could pay yourself a ‘living wage’ each month from your company’s normal payroll run. This should be based around a budgeted amount that covers your average monthly outgoings.
Unfortunately, with this method you’ll be paying PAYE income tax and National Insurance Contributions (NIC) on this monthly salary. This could be up to 45% (top rate of income tax) depending on the amount taken as a living wage. VERDICT: not very tax-efficient.
SOLUTION: pay yourself an amount that covers the current NI threshold, making what you earn tax free. This threshold currently stands at £8,424 per year, meaning you could earn £702 per month in this way without any PAYE or NIC.
You can pay yourself a dividend any time and at any frequency throughout the year, providing there is enough profit in your company (and available cash) to do so. Because you pay tax on the profit through your corporation tax (currently 19%), they’re usually a more efficient way than PAYE to take money out of the business and put it in your pocket.
However, the current £2,000 dividend allowance makes dividends a less attractive option for you as a director than in previous tax years. You could be taxed as much as 38.1% on any income earned over the £2k allowance– and this is on top of the 19% you’ve already had taxed on your profits!
You’ll pay tax on dividends you receive over £2,000 at the following new rates:
- 7.5% on dividend income within the basic rate band
- 32.5% on dividend income within the higher rate band
- 38.1% on dividend income within the additional rate band
Understanding your dividend payments
Dividends are only payable out of post-tax profits. So, if your business is not yet making a profit and you need some funds, you’ll have to do this via a salary not dividends.
Note: The same level of dividend must be taken by all your shareholders of the same share class, unless you’ve made a specific agreement for certain shareholders to waver their dividends.
Going a little deeper, if your business is carrying out research and development (R&D) qualifying activities then you’re better off paying your directors via a salary than dividends. Only payroll salaries can be considered in an R&D claim, not dividends, so paying salaries will increase the scope of your claim.
An efficient way to get paid
Director’s pay can be a complex thing to get your head around. But with the right guidance, planning and forward-thinking, you can very easily set up an effective, tax-efficient way to earn money from your limited company. Often a mix of salary and dividends is the most efficient method, depending on your circumstances. www.crowther.accountants/together/business-toolkit/tax-rates-2017-18/
As with most things in business, it’s about identifying the challenges, planning ahead and talking to a professional adviser.
Michelle Crowther – Crowther Chartered Accountants – Abacus House, Pennine Business Park, Longbow Close, Huddersfield, HD2 1GQ
Call us at 01484 515544 to discuss your particular situation in more detail!