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Salary or Dividend?

2 December 2010 No Comment

The question has been around for over 20 years

The established way for a small limited company to reward its director/shareholder is to take a small salary at the tax and NI threshold and to top that up with dividends. Of course that assumes the company has enough profit and can pay dividends. Dividends are paid out of the post-tax profit and all things being equal, a basic rate taxpayer will have no additional personal tax to pay.

It has long been argued (for more than 20 years now) that the Revenue will attack this arrangement, although to date they have not yet been able to find a way to do it.

So for every pound of profit you make, how should you reward yourself? More salary or more dividend? This illustration based on 2010/11 rates shows how Tax and National Insurance might affect your net income.

sal-or-div

The question is easier to understand if you put it this way “do you want to give the government 43% of your money or 21% of your money?” It’s your call!

If you are a higher rate tax payer with a total income of around £44,000 or more per year, then the rules are more complex. Take advice!

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