If you wish to follow the small salary big dividend method of rewarding yourself from your own company, this simple guide can help.
As a matter of routine, your company should prepare its own corporation tax reserve. You will probably need to prepare a personal income tax reserve as well. A company can only pay dividends from the company’s post tax profit. If you have no profit then you can pay no dividends. Do not pay out all of the profit as dividend, only the post tax profit. That means that the company tax reserve stays in the company.
Follow this system precisely, and ensure bank transactions between your company bank account and your personal bank account follow this system accurately. If it’s not right then HMRC may decide that PAYE tax and National Insurance is due on all of your personal income. Moreover:
- You must be a director of a UK limited company.
- Your salary is paid to you for the responsibility involved in holding the office of director and not for “work done”.
- You must also be a shareholder in the company.
- All shareholders must receive dividends in direct proportion to their shareholding.
- Beware of adverse consequences if you decide to take 100% of the dividend when you are not the 100% shareholder.
Other than salary, describe these amounts as “drawings” until the overall tax picture for the year is clear. The “dividend” is calculated later. Separate bank transfers are required in order to distinguish salary from drawings. It also makes life easier if you use separate bank transfers for primary, secondary (etc) drawings.
Basic rate taxpayers
For people whose monthly income does not exceed 4,165.
Higher rate taxpayers
For people who need (and can afford) monthly incomes between 4,165 and 8,333.
Top rate taxpayers
For people who need (and can afford) monthly incomes in excess of 8,333.
There are graduated changes for annual incomes between 100,000 and 150,000 and the 45% rate of income tax also kicks in.
In all cases, and especially in relation to that last table, we can provide an accurate tax forecasting service which fine tunes the optimum level of dividend to suit your income level, your savings, marital status, child benefit position and your country. It’s a premium service detailed on our prices page.
Let us know if we can help.