If you operate a limited company, are a shareholder and have profit reserves, you could pay a dividend to shareholders. If you are doing this for tax planning purposes be careful of how all shareholders are treated, especially if they are family members and not actually working in the business.
Anyone receiving dividends can utilise the dividend allowance which means the first £2,000 received is taxed at 0%. Over £2,000 the basic rate tax charge on dividends is currently 7.5% with higher and additional rates for higher earners. Salaries incur PAYE and Employees National Insurance contributions. Employers also pay Employers National Insurance contributions. Whilst companies will receive corporation tax relief on these costs (which would not be the case for dividends) the comparative cost can often be higher than the dividend route.
Whether or not it will be beneficial for you to pay higher dividends and lower salaries will be a matter for review. There is no simple rule which will apply to all and with higher taxes on dividends the decision is much more negligible than it has been in the past. Much will depend on your other income, role in the business and corporate structure of your company.
Taking a step back though, if you are starting in business you may want to review your choice of business structure first. Consider the cost of operating a limited company and the benefits of limited liability. See how these balance with potential tax advantages and make an informed decision. We can help with these discussions, allowing you to enter business with your eyes open.
Book a meeting with one of our specialists to discuss how best to structure your business and remuneration strategy.
