One of the key decisions for business owners is how to take their remuneration; whether by dividend or salary. There are advantages and disadvantages to both however previously the answer would generally have been dividends, as they were generally more tax efficient, but the recent changes in Corporation Tax rates have changed the landscape and it is worth re-evaluating your own income strategy.
Updated tax rates are identified in the tables below.
Salaries are generally fixed amounts and subject to income tax and national insurance contributions (NICs). Dividends are paid to shareholders out of the company’s profits after tax. Dividends are subject to income tax but not NICs.
It’s important to judge the right balance between salary and dividends while taking into account other variables.
We have found that it is generally more tax effective for basic rate tax payers to be paid through dividends.
However, remuneration through salary/bonus is generally more efficient for higher rate and additional rate taxpayers when the Corporation Tax rate of their business is above 19%.
There are a great number of variables that can affect the outcome of any remuneration calculations.
For example,
- You need to consider the impact of pension contributions and retirement planning on both your tax liability and overall financial well being. The pension regime remains a very favourable one.
- You should take a complete overview of all of your income streams including for example, tax credits (child tax credit, working tax credit), child benefit and other means-tested benefits; also rental and investment income.
- You can consider other ways of extracting income from the business for example through rent payments and loan interest.
- You should take into account the terms of life insurance and similar policies to ensure they cover dividend income and not just salary.
- There are also circumstances in which a regular salaried income is important, for example obtaining a mortgage.
It is essential that your own personal circumstances are taken into account in relation to remuneration strategies. There is not a “one size fits all” solution. Please contact your usual adviser or email us at info@rpg.co.uk to arrange to a meeting – we look forward to discussing this in more detail with you.
| Corporation Tax Rates from 1 April 2023 | |
| Profit band | Effective tax rate |
| Up to £50,000 | 19.0% |
| £50,001 to £250,000 | 26.5% |
| £250,001 and above | 25.0% |
| Dividend Tax Rates | |
| Basic rate tax payers | 8.75% |
| Higher-rate tax payers | 33.75 |
| Additional-rate tax payers | 39.35% |
| *For the tax year 2023/24, the 0% dividend allowance has been reduced to £1,000 and it will reduce to £500 in 2024/25 | |
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