Will It Still Be Sensible To Take Income In Dividends?
Increases in the dividend tax levels from April 6 are set to eat into the income of directors, who will often pay themselves in dividends, but is it still sensible to take payments this way for the coming tax year?
The dividend tax rates are set to rise by 2 percentage points from April 6. This will raise the Basic Rate from 8.75% to 10.75%, and the Higher Rate from 33.75% to 35.75%. But the Additional rate of 39.35% will remain the same.
So, does this rise create a case for paying yourself via a salary rather than dividends going forwards, or are dividends still the best way for directors to pay themselves from their companies?
Dividends still win, but a mix of salary and dividends is best
Even though the increase in dividend tax rates will reduce the benefit of paying yourself in dividends, it still makes more sense financially to take dividends than it would to pay yourself a salary alone in most cases.
By taking a salary, your company would need to pay Employer National Insurance Contributions (NICs) on your salary at 13.8% for any amounts of £9,100 or above. You would also need to pay employee NICs on your salary above £12,570 – which is the level of the personal allowance – at 8% up to £50,270, and at 2% above this level. On top of this, you also pay income tax at 20% as a basic rate taxpayer, 40% as a higher rate taxpayer, or 45% as an additional rate taxpayer.
By taking dividends, assuming your Corporation Tax has already been paid and your profits are high enough for you to do so, you would usually have more in your pocket as they are not subject to NICs like a salary. Your company would pay no NICs, and neither would you, and the dividend tax levels are also below the higher rate and additional rate income tax bands.
If you’re not earning much in dividends, you should check with your accountant whether you’re better off taking your earnings as a salary or in dividends, as there could be a point where the balance tips in favour of salary. But typically, you are still better off taking dividends, even though the benefits are narrowing.
Still, the best way to pay yourself from your company is likely to be via a mix of the two. This would mean taking a small salary, equivalent to the personal allowance of £12,570, and then taking the remainder in dividends. This means you pay some NICs, which will still qualify you for the State pension, but you will pay little or no income tax on the salary, and a salary is also deductible for Corporation Tax.
Let us help you
If you are interested in seeing how you can legitimately reduce your tax burden through dividends, then please get in touch with us and we will do what we can to help you.
