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OCL Accountancy: Salary vs Dividends for Company Directors

As a Director and shareholder of a Limited Company, inevitably you will want to reap the benefits of your hard work by withdrawing some of the company profits.

Funds can be withdrawn from your company via a salary or dividends. It won’t be news to you that dividends attract lower income tax rates than salaries, so at first glance, a dividend would seem the most tax efficient. On top of that, dividends are not subject to Class 1 National Insurance Contributions (NIC), whereas salaries are.

There is a more tax efficient option, however. A salary and dividends. Salaries are an allowable expense for your company. A salary paid to you can be deducted from the company’s profit, resulting in a lower Corporation Tax liability. Dividends do not generate such Corporation Tax relief.

Class 1 primary NIC is paid by you personally on a salary of over £12,570 for the year (this comes into effect from 6th July 2022 and is £9,880 before that). Your company pays Class 1 secondary NIC if your salary is over £9,100 for the year.

Therefore, you can withdraw a salary of up to £9,100 a year from your company completely free from income tax and NIC, assuming you have no other income sources. With the added bonus of Corporation Tax relief for that salary.

In most cases, the optimum withdrawal of funds from the company is therefore a mix of salary and dividends. Utilise the £9,100 ‘zero Class 1 NIC’ by taking a salary of the same and take advantage of lower tax rates by declaring dividends as well.

If you have other income sources outside of your company, rental income for example, there is still a benefit to withdrawing company profits in this way.

Don’t forget that you can also withdraw funds from the company without declaring a dividend or salary if your Directors’ Loan Account is in credit. That means the company owes you money and you can withdraw it without incurring a tax liability.

If personal pension contributions are on your agenda this year, please note that dividends do not count as relevant earnings, whilst a salary does. This can be important for optimum tax relief on pension contributions and should be considered.

Finally, we should all expect changes to the tax landscape in future years as the Chancellor continues to look for ways to balance his books; the new corporation tax rates will already impact tax planning. For a deeper understanding of the specific details and benefits for you and your company, please contact us.

For tax saving tips contact us – call Marie Sheldrake, Matt Bryant or Samantha Taylor on 01225 445507.