Download Salary V Dividends

Salary V Dividends
If a company is not deemed to be caught under the IR35 legislation there are a choice of
methods available for the extraction of cash from the company.
The company may pay a Salary to all employees of the company including its directors, it
may pay a Dividend to each of its shareholders in their capacity as such, or it may opt to
pay a combination of Salary and Dividend.
Whichever form of funds withdrawal is chosen there are tax implications on the recipient,
however, there are certain important factors to consider before choosing one method in
favour of the other.

Dividends are a return on investment and as such are not subject to National
Insurance

Certain government benefits (such as state pension and unemployment benefit) are
conditional on minimum levels of National Insurance contributions being made

Dividends are out of post tax profits and therefore do not reduce the company’s
liability to Corporation Tax the way that Salary payments do

Dividends attract a highest rate of tax of 32.5% as opposed to a higher rate tax
charge of 40% on Salary

Dividends can only be paid out of accumulated profit; a bonus could be paid even if
the company made a loss.

Dividends do not constitute Net Relevant Earnings and are therefore not considered
when calculating the amount a person could contribute to a pension scheme.

The Inland Revenue may subject a large bonus payment to a non-working individual
to the ‘commercial reality test’ and ask detailed questions to the company.
Dividends are not subject to such tests and many family companies pay dividends to
lower income shareholders who either have no tax burden or who suffer at the
lower rate only.

Dividends must be paid in the accounting year to which they relate. A bonus of
Salary can be paid up to nine months after the accounting year, potentially placing
the bonus in the next income tax year and allowing useful tax planning.
At Cookson Dell will assist you in determining the most suitable method of extracting funds
from your business.