The question of how much should be taken as salary and how much as dividend to minimise the tax bill is raised very often. I will response this question based on the normal small business situation. My response is not intended to apply people with very high earnings or where the company is making more than £300k profits per year.
- Salary attracts both employees National Insurance (NI) – 11% and employers NI 12.8%. Dividends do not attract any NI. This is where tax savings are generated.
– Pay yourself a salary of £5,715
– Any further sums you need take it as dividends
Pay Dividends Correctly – Or Pay The Consequences
This is an area of tax planning that HMRC may want to attack in future years. You don’t want the Taxman wanting to treat the payments as a loan to you or even as salary. If the dividends are treated as a loan, which is the Taxman’s most likely approach if you do things wrong, the company must pay 25% of the loan over to HMRC, and you are personally assessed to a benefit for having an interest free loan from your company. So this is what you need to do…
- You need to know you have enough retained profits to be able to pay the dividends by law. Retained profits are all profits since the company started that haven’t already been paid out as dividends.
- Check your company’s Articles of Association as to who can recommend and authorise a dividend. The directors of the company will normally recommend the dividend, and the shareholders will approve that recommendation.
- Pass a company resolution authorising the dividend. A simple standard word-processed document can be used, which we can provide to you if you sign up for our newsletter https://www.southsideaccountants.co.uk/sign-up-to-our-monthly-tax-saving-tips-newsletter/