More menu
"What is the best mix of salary and dividends" is a question often asked by business owners.
In this regard there is no one-size-fits-all approach when it comes to choosing how a business owner remunerates themselves, the best mix depends on your financial situation, tax considerations, and long-term goals.
In this article we take a look at some of the questions we often receive from clients.
There are many reasons why a salary may be appropriate. Receiving a salary is a steady form of income, being paid a salary ensures that an individual receives a qualifying year for state benefits and a salary is a tax-deductible expense for the business.
Dividends are a form of income business owners can receive but are not the same as salary, they don’t attract any corporations tax relief nor do they count towards a qualifying year for state benefits.
Personal financial circumstances are different for each person, most people will choose to pay themselves a mix of both salary and dividends.
For those with no other form of income, or no specific requirements, they may choose to pay themselves a salary of £12,570 per annum. At this level they find it tax efficient as well as they can ensure they receive the qualifying year for state benefits.
Those individuals who have other income from other sources may choose a different amount. Consideration is given to the type of income and amount of other income.
Some will choose to pay themselves a specific amount in salary to satisfy specific financial goals, examples include a mortgage application or other finance applications.
IR35 is another key consideration when an individual chooses the salary level.
In regards to dividends, again the choice of how much to pay as a dividend will vary widely from person to person.
Firstly, as a director, consideration needs to be given to the level of available profits, a director then can choose if they want to pay all or some of these profits to the shareholders. With dividends it is not normally a set amount, the director will choose an amount based on the level of profits which can vary from period to period.
Dividends in the hands of the shareholder are taxable income, so owner managers will also consider how any dividends received will be taxed prior to making payment.
Directors will also choose how often they want to distribute profits as a dividend, some choose to do so weekly, some monthly, some quarterly and some annually. Dividends are very flexible in that they can be paid from a limited company for any amount (subject to available profits) and at any frequency.
The impact of personal taxation is also a key consideration. Salary and dividends are a form of personal income in the hands of the recipient.
Salary is subject to the income tax at 20% for basic rate taxpayers, 40% for higher rate tax payers and 45% for additional rate tax payers.
In respect of dividends, firstly all individuals are entitled to receive £500 tax free dividends each tax year, then dividends are subject to 8.75% tax for basic rate taxpayers, 33.75% tax for higher rate tax payers and 39.35% tax for additional rate tax payers.
