Why Companies Could Use Dividend Payments Instead Of Just Salaries To Save Personal Tax

Online, April 22, 2013 (Newswire.com) - For many Business, it is pretty much a common strategy to make use of dividend payments rather than higher bonuses in order to save taxes for the working shareholder. The savings in connection with this comes via the fact that NI is payable on salaries while there is no national insurance contribution on dividend payments. In situations where the owner of a company also happens to be an employee in that business they have the choice to take out their remuneration either in the form of dividends through their position as shareholders or earnings because they are employed by the business or a combination of the two. London accountants largely employ this strategy in instances where the small companies rate of corporation tax applies.

In the absence of earned income, there are going to be zero National Insurance . Consequently the question is why then pay a salary in any respect? Why not simply pay everything out as dividend and avoid the NI pitfall completely? Basically the answer is in what we receive from paying National Insurance. Much of our National Insurance Contribution affects much of our entitlement to state benefits including state pensions, statutory sick pay, statutory maternity pay, statutory paternity pay, and so on.

The one thing with National Insurance and the many benefits most of us derive out of them would be that the amounts aren't directly proportional. However your contributions are directly proportional with the chargeable earnings.

Thus, after a certain degree of National Insurance Contribution, hardly any more added benefit is going to accrue by further payment. Usually the ideal level of earnings needed to achieve this maximum benefit level depends on personal circumstances.

Company owners, much like any one else require money on a frequent basis. Having worked out what annual earnings a person require, you want to make up the rest by way of dividend. In setting the monthly dividend rate, it's critical to ensure that you do not exceed the authorized limit.

The appropriate limit here basically refers to the sum which ensures that dividends are only paid using distributable profits. Usually the distributable profits of a Company would be the accumulated earnings less it's accrued losses. The primary hazard of exceeding the distributable reserves is usually that the Revenue could contend that the extra are cheap loans to company directors which can complicate things. Thus, whilst dividend may be the much more tax efficient strategy to extract salary from your business enterprise, it is important that the business owners make sure that dividend amounts do not go beyond the firms accummulated profits.

This is an illustration of a basic income tax planning method that can legally save a business tax. Though it must be borne in mind that this valuable tax planning technique is only useful for Ltd Companies. It can also be a very good reason why anyone who is operating a business enterprise in the form of sole trader or unincorporated partnership should consider transforming their business legal entity to a Ltd Company. More so if the business enterprise is making a decent profit margin. This is something which any general practice accountant will be able to advice about. Ensure you consult a qualified professional accountancy companies before putting into action any of the concepts in this post as they really are very dependent on personal variables.