You put a lot of work into your business, so you need to make sure you are reaping the rewards.
As a business owner, you need to find a way to get the income you deserve, without paying more tax than you are required to.
To strike this balance, you can opt to be paid through a regular salary, alongside dividends from your company’s profits.
However, when deciding how to structure your income, several tax issues come into play, so you need to consider the following:
Can anyone take out dividends?
You might think that you can do what you want with your business’s finances, but this is not the case.
Firstly, you need to think about the business’s interests as well as your own.
To take out dividends, your business needs to have an accumulated profit after tax. If you take money out of your business that it relies on, you could jeopardise its stability and be in breach of your legal duties as a director.
You will also need to seek board approval to pay any dividends out.
It is important to note that you can only take dividends out in accordance with the company’s Articles of Association or Shareholders’ Agreement.
Dividends are not classed as an allowable business expense for Corporation Tax.
How are dividends taxed?
Before making any decisions, you need to be aware of your personal tax liabilities should you take out dividends.
The tax-free dividend allowance is £2,000. So, only dividends above this threshold will be liable to tax.
Any dividend income over this amount will be taxed at your marginal rate as follows:
- Basic rate – 8.75%
- Higher rate – 33.75%
- Additional rate – 39.35%
As outlined in the recent announcement by the new Chancellor, Jeremy Hunt, these rates will no longer change in April 2023
What taxes do you have to pay on your salary?
The personal allowance is £12,570. So, you will need to pay Income Tax on any earnings above this threshold.
If you earn more than the NIC Primary Threshold, which is currently £242 per week, you will need to also pay National Insurance Contributions, at the rate of 13.25 per cent.
Your business will also be liable to pay NICs, which is currently 15.05 per cent.
It should be noted that from 6 November, the additional 1.25 per cent Health and Social Care Levy will be removed from the NIC rates.
Salaries are also classed as an allowable business expense for Corporation Tax. Also with the salary, you are building up to qualify for State pension. You are also entitled to certain benefits such as sickness, maternity and paternity.
How are you planning for your future?
It might seem like a long way off, but you need to think about how your decision will impact your retirement fund.
To qualify for a state pension, you need to be earning a salary equivalent to, or above, the NIC Lower Earnings Limit, which currently stands at £123 per week.
Bear in mind that paying these contributions also means that you are eligible for maternity/paternity benefits.
To make sure you fulfil your tax obligations and make the most of your business’s profits, it is best to seek advice from a tax expert.
For payroll advice, contact our team today.