Dividends vs. Salary: What you need to know

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When running a business, one important decision to make is how to pay yourself. However, understanding the differences between taking a salary and dividends may not be straightforward. In this article, we’ll break down the key points you need to know to make an informed decision…

Profitability matters

To pay dividends, you need to have distributable profits. This may seem obvious, but it’s an important point to remember. You need to not only consider the profits in the current year, but you must also review accumulated profits, since dividends cannot be paid out of losses.

It’s relevant to note that profits aren’t the same as cash in the bank. Your company could have cash in the bank, but if there are no profits, dividends should not be paid.

Dividends vs. Salary: Which to choose?

If your company is making a loss, you can still pay yourself a salary, when paying dividends is not an option.

Salaries are an allowable deduction when calculating the Corporation Tax, whereas dividends are not. Paying a salary will reduce a Corporation Tax charge, but paying dividends will not have any effect.

State Pension

Paying a salary, above a certain level, counts towards your state pension. To get a full state pension you currently need 35 years on your National Insurance Record and a minimum of 10 years to receive anything at all. Dividends do not count towards your state pension.

Tax implications

One key factor to consider is the tax implications of paying yourself a salary versus dividends. You need to assess the impact on both you and your company of Income Tax, National Insurance Contributions (NICs), as well as the Corporation Tax paid.

On 1 April, the Corporation Tax rates changed. See our article on this subject and updated information on the latest tax rates.

An experienced accountant will be able to determine the best approach to paying a salary and dividends for your specific circumstances. Please get in touch with Teresa, if you require any guidance, she’ll be happy to assist you.

Other Factors

You may need to consider other factors, for example:

  • You may have insurance policies that pay out based on a multiple of your salary. If you opt to pay yourself dividends instead of salary, it may reduce any pay outs if claims are made.
  • There may be other methods of remuneration as part of the overall package, such as a pension or providing a company car.
  • Think about the timing of dividends to minimise the tax impact.

In conclusion, deciding between dividends and salary requires careful consideration and Burton Sweet can help you make an informed decision that is right for your business and personal finances.

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