The payment of Salary vs Dividends is an area to consider for Business owners when drawing money out of their Company.
Under the current tax regime drawing out Dividends will definitely result in the individual paying less Income Tax than they would incur if the amount was paid as Salary. However, to pay entirely (or even largely) in Dividends may be likely to be seen by HMRC as aggressive tax avoidance and may then make the individual liable for investigation.
The Salary Vs Dividends examples below are arbitrarily based on an individual taking out £150,000 from their company in the course of a year. It shows the tax comparisons for taking the money out entirely in Dividends, entirely in Salary and some mixes of both – namely:
- Scenario 1 – salary only
- Scenario 2 – dividend only
- Scenario 3 – half salary half dividend
- Scenario 4 – one third salary two thirds dividend
- Scenario 5 – two thirds salary one third dividend
We cannot comment on what may be best in any individual case without knowing all of the surrounding details, but our feeling is that in general to obtain a satisfactory tax reduction without offending HMRC is likely to be a fairly even mix of Salary and Dividends.
In the following example the tax bands and rates are shown on the left of each example.
Notes on Salary Vs Dividends examples
- Personal Tax Free Allowance £11,000 withdrawn all cases
- Dividend income comprises top marginal income for tax i.e. pay uses up basic and higher rate band first
- *MPR/MLP national insurance contributions (nics) pay. MLP Nics are deductible for corporation tax
- **no MPR/MLP nics
- ***Starting savings rate of £5,000 reduces basic rate band in all cases – effectively you have had little benefit as your pay over £27,000 attracts higher rate tax – normally £32,000