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Dividends or Salary? How Do I Pay Myself?

 

As an owner-managed business, you may be wondering what the most tax-efficient way to take remuneration out of your company is. There are several options available, each with its own benefits and drawbacks. Here are some of the most tax-efficient ways to take remuneration out of your business:

Salary

Paying yourself a salary is a straightforward way to take remuneration from your business. As an employee of your company, you’ll pay income tax and National Insurance contributions (NICs) on your salary at the usual rates. However, you’ll also be entitled to certain benefits, such as a workplace pension scheme and statutory sick pay.

The tax and NICs on your salary will be deductible expenses for your company, reducing your corporation tax liability.

Dividends

Another option for taking remuneration out of your business is to pay yourself dividends. Dividends are a share of your company’s profits that are paid to its shareholders.

Dividends are taxed at a lower rate than salary, and there’s no NICs to pay on them. For the tax year 2022/23, the first £2,000 of dividends you receive are tax-free, and then you’ll pay tax on any additional dividends at the dividend tax rates of 8.75%, 33.75%, or 39.35%, depending on your income tax band.

These rates will remain the same for 2023/24.

Dividends on ISA’s are tax free.

Dividends are not tax deductible and do not reduce your corporation tax.

It’s worth noting that your company must have sufficient profits available to pay dividends, and you must have issued and paid-up share capital to receive them.

Pension contributions

Making pension contributions is another tax-efficient way to take remuneration out of your business. Your company can make contributions to your pension scheme, and these contributions are tax-deductible expenses for your business.

As an individual, you’ll receive tax relief on your pension contributions at your marginal income tax rate. This means that if you’re a higher or additional rate taxpayer, you’ll receive a bigger tax relief on your contributions.

Benefits in kind

You could also take remuneration in the form of benefits in kind, such as a company car or private medical insurance. These benefits are tax-deductible expenses for your company and can be a tax-efficient way of taking remuneration.

Most benefits in kind, such as a company car, are subject to a personal tax charge so the overall tax benefit has to be carefully considered.

In conclusion, there are several tax-efficient ways to take remuneration out of an owner-managed business, including salary, dividends, pension contributions, and benefits in kind. It’s important to consider the pros and cons of each option and seek professional advice to ensure you’re making the most tax-efficient choice for your circumstances.

Disclaimer:

Paul Stankiewicz is the owner and principal at Paul Marks & Co Chartered Accountants which is the trading name of Paul Marks Ltd a Limited Company registered in England and Wales (registered number 4487645). This article is designed for the information of readers only and is the opinion of the author only. Readers should not act on any of the information contained in this article without seeking professional advice. Nothing in this article constitutes advice, nor does the transmission, downloading or sending of any information or the Material create any contractual relationship. Links to third party websites are provided as a convenience to the reader, Paul Marks Ltd does not control and is not responsible for any of those websites or their content.Paul Stankiewicz and Paul Marks Ltd accepts no liability or responsibility whatsoever for any loss or damage suffered by any user of the information contained on or accessed through this article or the Material downloaded.