08/06/2022 by Pete Bird
Remuneration or Dividend
Remuneration or Dividend
One of the perceived major benefits of incorporation is the ability to extract profits from the company by way of dividends. The main advantage is the National Insurance saving, as no NICs are payable on dividends, whereas a salary payment would attract employee NICs of 13.25% or 3.25% and employer NICs of 15.05% (2022/2023 figures) once the salary exceeds the primary and secondary thresholds.
All taxpayers receive a dividend ‘allowance’, regardless of their marginal rate of tax. This dividend allowance is set at £2,000 for 2022/23. However, this is not an ‘allowance’ as such, rather a zero-rate band which taxes the first £2,000 of taxable dividend income at a rate of 0%.
Thereafter, for 2022/2023 dividends (which are treated as the top slice of taxable income) are taxed at 8.75% to the extent that they fall within the basic rate band, 33.75% to the extent that they fall with the higher rate band, and 39.35% to the extent that they fall within the additional rate band. The dividend tax rates were increased by 1.25 percentage points from 6 April 2022 to provide funding for health and adult social care.
A payment of salary will attract tax at the taxpayer’s marginal rate of income tax (20%, 40% or 45% (or, for Scottish taxpayers, at the relevant Scottish rate)). Salary payments are deductible in calculating profit for corporation tax purposes, unlike dividends which must be paid out of after-tax profits. Further, dividends can only be paid if there are sufficient retained profits, or reserves. In addition, various company law requirements must also be met.
It is not simply a case that dividends are always best, although in many cases, taking dividends will result in less tax and National Insurance than taking a salary payment.
However, the best result will depend on the circumstances, as the decision whether to take salary or dividends will depend on the interaction of various factors – respective rates of income tax, corporation tax and National Insurance contributions, any other income that the taxpayer has and whether the company has sufficient retained profits (reserves).
To decide whether to extract profits by way of a dividend or a salary, the numbers have to be crunched first.
Looking ahead: the rates of corporation tax will increase from 1 April 2023 for companies with profits in excess of the lower limit, set at £50,000, as divided by the number of associated companies. From this date, where profits exceed this level, corporation tax will be charged at 25%.
However, this will be reduced by marginal relief where profits fall between the lower limit and the upper limit, set at £250,000 as divided by the number of associated companies. The rate at which corporation tax is payable will impact on the profit extraction salary.
We have already crunched the numbers and notified all our limited company clients of the most tax efficient way to extract profits from their company by email on 5 April 2022. For their information if they wish to reference this, the subject line was “Directors Monthly Salary Review”. We are quite happy to share this review with anyone if they drop us an email.