Salary vs dividends – what’s the best mix and why would someone who has the choice conclude that “PAYE is the best”?
For many, many years the combination of “low salary-high dividends” has been the favoured choice of remuneration for many shareholder-directors because usually it means less money going to the Treasury in taxes and NI.
So why would a client of ours who has this choice conclude that “PAYE is best!“?
This is a stunner of a reason.
With no salary costs for the directors going through the P&L and no related payments going out of the bank to HMRC, this company found they didn’t have a clear picture of the real profitability and cashflows of their business.
They also found they didn’t really know what their business was capable of.
For sure, there are other ways of doing this but putting themselves on the payroll at a market rate gave them the insight they needed very simply and effectively.
💡Profitability improved.
We’ve seen this often over the years and especially during the pandemic.
Many shareholder / directors don’t understand their tax returns very well in a “low salary – high dividend” world.
Large tax payments in July and January, reductions to and the occasional resurrection of payments of account catch a lot of people out.
Also, dividends and withdrawing money can get themselves wrapped up with the dreaded “directors’ loan account” which is another area in which confusion can easily reign.
Putting remuneration through the payroll and paying the PAYE each month takes a lot of the worries and surprises away.
💡The extra tax and NI can be a price well worth paying for peace of mind.
Mortgage brokers and lenders like a payslip and a P60 when they see one and too many struggle to understand the borrower’s finances when dividends are involved.
But even the best laid plans can go awry.
⚠️We saw one case where the shareholder / directors flipped to salary only and when it came to re-mortgaging a couple of years later, their broker and lender could not and would not understand how it was that the company’s profit had apparently deteriorated without something disastrous having happened.
In all of the scenarios above, the really important point to remember is that you can always stop what you’re doing and change tack.
The guys who wanted to stress-test their business knew very well that they could pay themselves less at the drop of a hat if that became necessary.
The salary-dividend decision is not something to change very five minutes but neither is it set in stone.
The simple answer is that we help you keep an open mind about the options available.
We’ll also take you back to the real starting point which is to ask “how profitable is my business?“
There’s nothing to pay you out of if your business isn’t making a profit and we’ll look closely at profitability and at the accuracy of your business accounting with you.
If there are decions to be made then we’ll discuss:
Salary vs dividends is one aspect of running an owner-managed company. If you’re looking for help with any financial aspect of your business then we can help.
☎️ call Michael Austin on 020 7125 0270
📧 info@bluedotconsulting.co.uk
Why does salary vs dividends make a difference?
Salaries and employer’s NI are operating costs of the company and reduce the profit on which corporation tax is payable. A lower profit can also reduce the rate at which corporation tax is charged.
Dividends are NOT costs of the company, they are a sharing out of after-tax profits to shareholders.
Therefore, higher salaries reduce the corporation tax charge and higher divdends increase the corporation tax charge.
National insurance is not payable on dividends.
Also, dividends are taxed at lower tax rates than salaries in your personal tax returns.
So, generally, higher dividends lead to higher corporation tax, lower national insurance and lower income tax.
Higher salaries lead to lower corporation tax, higher national insurance and higher income tax.
The devil is in the detail.
I’ve heard that the tax rates on dividends are increasing – what does this mean for salary vs dividends?
It means that the tax / NI saving of going the “low salary – high dividends” route is decreasing for any level of income.
➡️Bookkeeping, accounts and tax for a one-person company
Is any of this affected by Making Tax Digital for income tax?
No. Only landlords’ income and self-employed income are caught in the first wave of MTD. Salary and dividends are not included in MTD.
➡️Making tax digital – the useful bits have little to do with tax!
I can just pay myself a load of money and we can sort this out later, right?
Wrong!
➡️Better bookkeeping for London
Blue Dot Consulting provides accounting and business advisory services to clients across Central London, West London and South West London, with particular focus on Fulham, Hammersmith, Richmond, Putney, Wandsworth, Kensington and Chelsea. We help local business owners make better financial decisions and plan confidently for the future.
© Blue Dot Consulting Limited, Chartered Accountants, Bedford House, Fulham Green, London, SW6 3JW
We don’t believe in forms, we believe in talking to people, finding out your needs and tailor-making a solution just for you.
Give us a ring on 020 7125 0270 or email us at info@bluedotconsulting.co.uk
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