Helpsheet

Salary vs. Dividends:
Reduce Tax and Increase your Net Pay
(Pro's and Con's)

Can a business reduce its tax liabilities by paying dividends as opposed to salary? The answer is not always obvious and can only be found after a thorough, expert review of the business.

Which Is Right For You?

This very much depends upon circumstance. The following table outlines some of the initial considerations:

	Pros	Cons
Income through PAYE	Lots of free help available from H.M.Revenue and Customs	Sometimes less affordable for smaller companies due to the added overhead of Employers National Insurance contributions
	Tax and National Insurance liabilities are pretty easy to calculate at source, and paid as you go	Only Employees of the company can be paid under the PAYE scheme
	Allows efficient use of the Personal Allowance and starting rate of tax (10%) where applicable
	Employment expenses are deductible from the profit chargeable to Corporation Tax
Income through Dividends	No National Insurance	Usually paid from accrued profits of the company (although we have been able to overcome this in some circumstances)
	More tax-efficient in most circumstances
	Can be paid to company Shareholders who are not necessarily Employees of the company

 

As Accountants and Tax Advisers, the Accountancy Coop is able to provide a review service that enables businesses to visualise which method would work best in their situation and ultimately the amount of money that could be saved.

The “Salary vs. Dividend Review” includes:

1. A review of the remuneration for each shareholder taking into account any other income they have.

2. Identification of the savings available depending upon whether these are received by the shareholders retained by the company or split between them.

3. Guidance on the correct dividend procedures to ensure that they comply with company law, so that the legality of the dividends cannot be challenged by H.M. Revenue and Customs.

4. A review of the effect of the new policy on the company’s Corporation Tax.

5. An analysis of the effect of the new policy on the shareholders' Self-Assessment Tax Returns and their tax payments.

6. A review of other considerations such as properly waiving salaries and the impact upon life assurance policies, pension arrangements etc.

 

More in this area:

• Pros and Cons
• Worked Example
• Dividend Calculators
• Utilising the Spouse Allowance