Salary v dividend

Salary v dividend

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Been doing some calculations but still trying to get it right before advising client.

Basic salary being drawn off £5712 per annum

Basic dividend of £32,500 declared each year.

Therefore no additional tax due by director / shareholder.

The company makes in excess of £400k, overall would there be less tax/NIC paid as above or would a bonus of say £30k be an overall tax/NIC saving?

Replies (9)

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By PennyC
01st Sep 2010 14:09

Don't need to do the calculations

Dividends are cheaper - at the moment - regardless of profit level.

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By geoffwolf
01st Sep 2010 14:45

not an answer to the question but

is maximum use of pension contributions being made?  With profits at this level it may well be better to increase salary levels to increase the size of a pension pot and therefore a future tax free lump sum as against current relatively minimal tax/nic saving.

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By firtrees
01st Sep 2010 16:09

No major pensions

The guys have small pensions, as this is 2nd year of good profits and they look likely to continue they would be interested in tax saving messures such as pensions.

The NIC always put me off declaring a bonus or even incresing the salary.

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Kevin Salter
By Kevin Salter
02nd Sep 2010 08:13

tax calculation

Before doing the calculations......see BBS Computing/2020 Tax Tips and Tools.

Incorporation and salary v dividends calculators, and over 100 other practical tax tools and checklists....

 

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By taxhound
02nd Sep 2010 09:36

Pensions

If they want to make pension contributions, I would advise the client to make employer pension contributions direct from the company.  Then you are not restricted by salary levels.  It also avoids national insurance as you can keep the salaries low.

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By geoffwolf
02nd Sep 2010 13:38

Another consideration

is the effect of long term sickness. In a situation where profits are large, salary is minimal and the effect of long term sickness would cause profits to drop or become non-existent, considerations other than saving some NIC come into play. Insurance seems to be something to look at here and low salary can severely affect any payout.

My gut feeling is that your clients need to be made aware of all the ramifications of only looking at tax minimisation. 

e.g what size mortgage may they want to take out at a future date? OK many lenders will look at dividends but will they look at company profitability? 

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By petestar1969
06th Sep 2010 16:23

Hmm

I'm fairly certain that all income, including dividends, counts for pension purposes now, or have they changed the rules again?

At that level of profit they could look at doing an EBT to get the money out as long as they are comfortable with the risks, cheaper than dividends and much cheaper than a salary bonus. Not worth doing if its less than £100,000 though.

 

 

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By aburt01
06th Sep 2010 16:57

Bonus?

Aside from dividends, you also mention bonus?!? as an option. A 1-off payment/bonus to a director is not going to have a PAYE tax saving nor is it going to have a NIC saving, since Directors NI calculation is a cumulative calculation and not a 1-off calculation.

However, a bonus to a monthly paid employee, who is not a director in any shape or form, if it exceeds the UEL for the month is going to save employee NIC.

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By Dunedin
22nd Sep 2010 17:58

what no-one wants to hear on this subject....

 

It should be remembered that the small salary/ dividend route is vulnerable to National Insurance charges. The PA Holdings decision has been upheld by the Upper Tribunal. For more detailed comments see the following http://www.chiene.co.uk/GetFile.aspx?file_id=358  The practical question is where HMRC goes from here on this subject.

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