Salary and dividends
20th December 2018
Taking money out of your company appears to boil down to a simple choice: whether to take salary or dividend but it’s possible to combine both methods to reduce your tax bill.
You are considered to be an employee who is entitled to a salary if you are a company director, while you can also hold shares in your company that may produce dividends.
Both methods are taxed differently, and in our final blog of the year we explore the most tax-efficient ways to extract profits from your business in 2018/19.
Despite being entitled to a wage as a director of your company, you do not have to worry about paying yourself the national minimum wage unless, for some reason, it’s written in your contract.
That has obvious tax benefits as you can pay yourself what you want, and that usually means less than the employee national insurance contributions (NICs) threshold of £8,424 in 2018/19.
If you pay yourself less than this amount, you may not have to pay any income tax – as it falls within the tax-free personal allowance of £11,850 in 2018/19 – or NICs on your salary.
It will also be possible for us to deduct your salary from your company’s corporation tax bill, offering tax-efficiency for both you as a director and your business.
If you earn more than the NICs threshold of £8,424 this year, employee NICs will be deducted at 12% and a further 13.8% employers NICs will be payable by the company on the amount exceeding the threshold.
At the same time, income tax will also be due at your marginal rate on any salary worth more than £11,850 in 2018/19.
An annual salary that is less than the employee NICs threshold isn’t likely to be enough to live on, but adding any dividends from your company profits can make it up while also being highly tax-efficient.
Everyone can receive dividends on shares in a business. The first £2,000 of any dividend is tax-free through the dividend allowance, which has seen steady reductions in recent years.
Income tax on dividends worth more than this will be taxed slightly differently, at 7.5% for basic-rate taxpayers, 32.5% for those in the higher-rate, and 38.1% for additional-rate taxpayers.
If your spouse or civil partner does not receive dividends from elsewhere, it may be worth considering gifting a portion of the shares you own in your company to them.
Our experts can advise on the most tax-efficient way to withdraw funds from your company.
However you wish to extract profits from your company, our personal tax planning service can minimise the amount of income tax you pay.
For more information, email us at email@example.com or call us on 0117 305 2600. It’s business as usual for us over the festive period, asides from being closed on Christmas Day and Boxing Day.