Salary v dividend

Produced by Tolley
Salary v dividend

The following Owner-Managed Businesses guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Salary v dividend
  • Non-tax considerations
  • Tax considerations of salary v dividend
  • Balancing remuneration between salary and dividends ― optimum tax position
  • High income child benefit tax charge
  • Self assessment tax returns
  • Timing of payment of tax on dividends
  • Timing of taxation of salary
  • Tax relief for remuneration for the employing company
  • Impact on company’s taxable profits
  • More...

For company owners, most on-going remuneration requirements will usually be met in the form of a combination of regular salary, bonuses or dividends. Although tax will be an important factor in determining the necessary combination, it will not be the only one; non-tax matters will often have more importance.

Non-tax considerations

The composition of a proprietor’s remuneration package should be considered carefully to try to achieve the most tax efficient result possible. Tax is, as usual, not the only consideration; the following must be taken into account in tax planning for a proprietor’s remuneration:

  1. ensure sufficient distributable reserves for payment of dividends, not only to satisfy immediate requirements but also taking into account future plans

  2. requirement for shareholder / external investor approval under terms of Company’s Articles of Association / Shareholder’s agreements, etc

  3. regulatory / industry requirements and guidelines relating to director’s remuneration

  4. Companies Act requirements regarding declaration and documentation of dividends

  5. timing and mechanics of payment of tax (see further guidance below)

  6. the application of the National Minimum Wage Act (see further guidance below)

  7. maintaining credit record for eligibility to receive the state pension (see further guidance on this below)

  8. whether there are any mortgage or insurance products which the proprietor purchases which are affected by the form of remuneration

  9. child benefit clawback ― (see further guidance below)

  10. what constitutes earnings for pension purposes, see the Pension contributions guidance note

For general guidance on extraction of profits, including longer term, non-cash and capital methods of profit extraction, see the Effective profit extraction ― overview guidance note.

Tax considerations of salary v dividend

Although the tax gap between salary and dividends has narrowed, it is important to remember that there are many aspects to consider when deciding how to extract profits and to keep sight of the overall picture. Legal, commercial and administrative factors are important in designing a profit extraction strategy.

In terms of tax, there remain other aspects to consider other than overall effective tax rates, for instance

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