What is the most tax-efficient way to take remuneration out of your company?
As a business owner, it’s essential to consider the most tax-efficient method of taking money out of your business. Salary and dividends are two options, but which is best? We have explored the pros and cons of each method and provided an example of how to determine the most tax-efficient way to remunerate yourself out of your company.
Salary:
When you take your remuneration as a salary, your company benefits from the corporation tax saving. However, you are taxed personally at the non-savings income rates (20%, 40%, 45%). If you take a higher salary, the company will get more tax relief. However, you’ll pay more tax personally, which means that you’ll receive less take-home pay.
Dividends:
On the other hand, there is the option of dividends, which are instead taken from the profits and reserves of the company post-corporation tax. Dividends are taxed at lower rates than non-savings income (8.75%, 33.75%, 39.35%). Therefore, many business owners have often preferred to take their remuneration by way of a dividend. However, the corporation tax rate is increasing from April 2023 to 25% for profits over £250,000 and to 26.5% between £50,000 and £249,000. Whilst dividend income is still taxed at a lower percentage than non-savings income, it may now be more beneficial for the company if business owners choose to take a salary from the company pre-corporation tax.
Example:
Our example below shows how this works in practice and compares the cost of taking a salary vs dividends. This will show you the most tax efficient way to take money out of your company.
Salary
Salary £80,000
Minus Personal allowance £12,570
Total Income on which tax is due £67,430
Income tax via PAYE £19,428
Directors’ National Insurance via PAYE £5,118
Net Cash you will receive £55,454
Cost to the business
Salary expense £80,000
Plus employer’s National insurance via PAYE £9,784
Total Expense £89,784
Minus Corporation Tax Saving 25% £22,446
(profits above £250,000)
Cost to the Business £67,338
Combined Salary and Dividends
Token Salary £12,570
Dividends £67,430
Combined Income £80,000
minus Personal allowance £12,570
minus Dividends allowance £1,000
Income tax via self-assessment £13,245
Net Cash you will receive £66,755
Cost to the business
Salary expense £12,570
plus Employer’s National insurance via PAYE £479
Total Expense £13,049
Minus Corporation Tax Saving 25% £3,262
Dividends £67,430
Cost to the business £77,217
To summarise, a combination of salary and dividends is still the most tax efficient way to remunerate yourself from your company as the net cash you will actually receive compared to the cost to the business is greater with both salary and dividend income combined.
If you are unsure which method is best for you, it’s always best to seek advice from a qualified accountant or tax advisor. If you would like assistance with tax planning or, want more information, please get in touch today or, call us on 01422 892000 to discuss whether tax planning could benefit you.
