Salary, Dividends or both?

Salary, Dividends or both?

You may have heard mention of tax efficient methods of extracting monies if you operate your business through a limited company, particularly with reference to salary and dividends.

Salary

Salary is subject to income tax and national insurance (NI), both employee’s and employer’s and any salary or bonus payment should be fully tax deductible in the company’s hands.

Dividends

Dividends are withdrawn out of post-tax profits and, up to the basic rate band, (currently £41,450) with no other income, these can be drawn at no personal tax cost to the individual due to a deemed 10% tax credit already paid.

So which is better?

Lets take as an example a company making a profit of £60,000 and look at three methods of extracting funds within a corporate vehicle. The assumption is that there is a single director shareholder with no other forms of income and the whole £60,000 is extracted by either salary only, dividends only or a mixture of salary and dividends.

salary-dividend-table

We can see from this table that the by taking a mixture of salary and dividend, there is a greater level of income in the individual’s hands and a lower overall tax cost by way of income and corporation tax. If the level of salary is taken to at least the lower earnings limit (currently £109 per week), this will ensure the individual’s entitlement to state benefits is preserved.

If this is something you are currently considering, or you’d just like some further information on the topic, please don’t hesitate to get in touch with Clare Vaughan on 01872 271655 or email at clare.vaughan@kelsallsteele.co.uk