For those who are directors and shareholders of their own companies, it’s time to make sure you are paying yourselves in the best, most tax efficient way.
The following guidance will outline this for you however individual circumstances will need to be taken into account but a lot of people will fall into the default setup which is what this article will explain. The default setup is that you have no other personal income, if this is not the case for you please reach out to us for specific advice for you.
You should also note that dividends can only be paid when a business has sufficient reserves. That is that it has accumulated a profit over its history (even if that’s just the last month). You should always have enough money within the company to pay the tax currently due. Failure to do so may mean the dividends are not legal.
Setup to pay no personal tax
For some people paying a minimum salary and dividend combo that incurs no personal tax at all is the desired outcome. It is not necessarily the most tax-efficient method especially if you still have spare profits. The table below gives the setup for this.
Setup to only pay basic rate tax (most popular)
This is the most common setup for director/owners. It is a combination of salary and dividends that only exposes you to a maximum tax rate of 8.75%. You still have the option of additional dividends (profits permitting) but these will be exposed to the higher rate of tax of 33.75%.
Above this level
If you have profits beyond this level then paying dividends is not normally advised as a tax-saving measure. If the income is needed or desired and it is accepted that 33.75% of income will be lost as tax then it is not wrong to pay dividends it’s just not necessarily a tax-efficient method. If it is not needed or desired then this may not be the best method of withdrawing funds from your company. You should consider other withdrawal routes and tax savings measures that may be open to you such as pension contributions and use of home as office agreements. As the tax at stake at these levels is quite high you should seek professional advice before committing to anything.
If you need further help or guidance around efficient tax planning then all of our packages include this as standard. Existing clients should simply book a call to discuss this with your client manager
If you are reading this article and are not a client but feel you need specific help then simply book a discovery call to arrange a call back to discuss further.