If you are both a director and a shareholder of your company, should you take extra income as a DIVIDEND or as a bonus? You can often save money by paying dividends, but the saving could be marginal and there are other factors to consider in deciding your remuneration strategy.
There are no national insurance contributions (NICs) on dividends, which is what produces the saving. Companies must pay employer’s NICs of 13.8% on a bonus and deduct employee’s NICs of 12% on earnings below the upper earnings limit of £41,450 and 2% on earnings above the limit. Against this saving is the fact that, unlike dividends, salary and employer’s NICs are deductible against CORPORATION TAX.
Paying dividends may allow profit to be diverted to a shareholding spouse. This could give an additional tax saving if the spouse pays tax at the basic rate.
Dividends do have some drawbacks however. They have to be paid at the same rate to all shareholders, making them less flexible, though you can overcome this by creating different classes of shares with different entitlements. Salaries can be paid even when the company is making a loss. Dividends can only be paid out of profits of the year or undistributed profits of previous years.
Dividend income cannot support pension payments. Having a low salary may restrict the amount of tax relief you receive when making payments into your pension scheme. And if you are near retirement and your pension will be based on earnings, you may need to enhance your remuneration at least in some years. Dividend income may also be treated less favourably by lenders if you are trying to obtain a mortgage.
As you can see, this is not an easy subject. Please contact us for a free initial consultation to look at which route is best for you.