FINANCE
BY KATIE HODSON , DIRECTOR , AZETS katie . hodson @ azets . co . uk
Salary or dividend for company owners and directors ?
IT HAS GENERALLY BEEN THE CASE THAT DIVIDENDS HAVE OFFERED COMPANY OWNERS AND DIRECTORS A COST EFFECTIVE AND FLEXIBLE REMUNERATION OPTION COMPARED TO A BONUS OR SALARY . HOWEVER , THE GAP BETWEEN THE TWO HAS NARROWED MORE RECENTLY , AND WITH THE RECENT CORPORATION TAX RISE FROM 19 % FLAT RATE TO AN UPPER RATE OF 25 %, IT CAN NO LONGER BE ASSUMED THAT A SIMPLE DIVIDEND OPTION IS THE MOST EFFECTIVE .
Now is an ideal time for directors and shareholders to assess their remuneration plans .
Tax effective remuneration
Regular planning is undertaken to help entrepreneurs , business owners and directors to extract profit from the business in a tax efficient way . There are a few options , but the most commonly used are through dividends or via a standard salary / bonus scheme ( or a combination of the two , depending on circumstances ).
Dividends
The ability to pay dividends relies on the company having distributable reserves in excess of the dividends to be paid . Dividends are not subject to National Insurance Contributions ( NICs ), and have been viewed as a more attractive way of extracting money compared to salary . Dividends , however , do not reduce a company ’ s Corporation Tax bill as they are paid out of the company profits after tax .
In terms of income tax , it is taxed at the dividend rate of income tax for the individual . The basic tax rate on company dividends is 8.75 %, the higher rate is 33.75 %, and the additional rate is 39.35 %. The tax due for a dividend paid in 2023 / 24 would be payable via self-assessment on 31 January 2025 , except for where payments on account are needed on 31 January 2024 and 31 July 2024 .
Bonus / salary
It can also be beneficial to receive pay via bonus / salary as this allows the individual to build qualifying years towards their state pension , and to make higher pension contributions if they wish . From a business perspective , the amount of corporation tax the company pays would be reduced , compared to receiving pay via dividends . Unlike dividends , however , there will be NICs due from both the individual and the company , and a higher rate of income tax will be payable by the individual .
The business will be able to claim corporation tax relief on the NICs and bonus / salary it has paid , so it can deduct both when calculating profits , which are subject to corporation tax .
Historic approach
Many directors and shareholders have paid themselves a minimal salary ( up to the general threshold for NICs ) and then rely on dividends for the balance of their income . This is more complex now with recent changes in tax rates - extra calculations and diligence is required as well as seeking specialist advice before going down this route .
Is there a clear cut answer ?
Every individual ’ s personal and business circumstances are different . Add into this the following tax changes coming into play in this new tax year and there are a number of influencing factors :
Corporation Tax - Increased from flat 19 % rate on all taxable profits to 19 % on taxable profits up to £ 50,000 and 25 % for taxable profits over £ 250,000 .
Marginal Corporation Tax rate - Effective rate of 26.5 % on taxable profits falling between £ 50,000 and £ 250,000 .
Income Tax
• Tax-free Dividend Allowance cut by 50 % to £ 1,000
• Additional ( 45 %/ 47 %) Rate threshold cut from £ 150,000 to £ 125,140
• Personal Allowances frozen
The most effective remuneration plan will also be affected by ancillary matters such as age , pension contributions , salary sacrifice arrangements and benefits in kind .
If you have any questions relating to which option is best for you or would like to discuss tax efficient remuneration planning , please get in touch .
Local offices : Ashford : 01233 629 255 / Canterbury : 01227 454 861 Maidstone : 01622 690 666 / Orpington : 01689 827 505 Sandwich : 01304 249 997
www . azets . co . uk
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