Salary and Dividend still best?

Limited Company, Payroll,

For many years now, the majority of accountants have advised their director or shareholder clients that the most tax efficient method of drawing profit from their company was to pay themselves a low salary, at or around the personal allowance level, with the balance in dividends.

This strategy has been under review for a while, since dividend taxes increased, but following the change to Corporation Tax rates things are changing again.

Should you still take your remuneration as a Salary and Dividend?

With company profits beyond £50,000 being taxed at an effective 26.5% rate, it may well be more tax efficient to increase the salary or pay a bonus through the company accounts. 

This has the added bonus of ensuring the company’s accounts more closely reflect the actual costs of the business. For example, if you were to sell a business where there is no salary for the Directors, this has to be added back to gain a clearer reflection of the running costs of the business. If you decide to pay yourself, as Director, a market rate salary, the accounts then give a clearer idea of the costs any purchaser would face.

Other ways to reduce your profits…

You may wish to consider the following to reduce your profits in a tax efficient way:

  • The company could pay more into your pension, taking account of the increased £60,000 annual input allowance.
  • The Company could provide you with an electric company car.

These suggestions are of course, generic, and may not be the right options for every business owner.

There are lots of factors to take into account when looking at the best tax decisions for each business, including the level of profit and how much you need to draw out of the company to live on.

We’d always suggest a conversation in advance of the company year end so that we can give you the best advice. Our clients receive a list of suggestions in advance of the year end, which includes a link to book an appointment straight into Chris’s diary. It’s important to take this opportunity to look at your options, as they usually disappear once the year end has passed!

If you’re unsure whether the ‘traditional’ option of salary and dividend is still right for you, please get in touch. It’s a conversation we’re having with quite a few clients, so we’re very happy to help you be sure you’re making the right decisions. In many cases there is no definite ‘right or wrong’ so it’s definitely one to discuss!

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