Salary and dividends for small business owners

We are often asked about the most tax efficient way of extracting funds from Limited Companies for small businesses. There are obviously many variables but a common way of doing it for for owner managers to take a small salary and the rest in dividends.

The main advantage of taking a small salary is to avoid paying National Insurance (both employee and employer’s) on the owner managers salary. Therefore staying at the Secondary Threshold (currently £153 a week or £7956) a year is a good idea as this level does not carry any NI. It also has the benefit of being above the Lower Earnings Limit which means that a year for the basic state pension is accrued. (If there are no other employees then the use of the Employee Allowance, a £2000 Employer’s National Insurance relief, can sometimes make a slightly higher salary worthwhile).

Once this salary has been decided then didvidends can be taken. As Corporation Tax has already been paid on these dividends there can be no additional personal tax to pay. The rates of personal tax on these net dividends (ie the amount of cash you receive) are as follows (on top of a £7956 salary):

Up to £30,518 – no additional tax

Between £30,518  and £82,840 – 22.5%

Over this amount it gets complicated as you lose your personal tax allowance and at £150,000 of total income there is a higher rate tax again.

There are many issues around the numbers above that need individual advice. I haven’t mentioned Child Benefit and losing it if your income is over £50,000 or the minimum wage and how to ensure you are not falling foul of the law. So as you can see it’s complicated! If you are concerned that you are not maximising your taxable income get in touch.