Salary v dividend

By Tolley

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

  • Salary v dividend
  • Non-tax considerations
  • Tax considerations
  • Tax rates for salary and dividends ― 2019/20
  • Tax rates for salary and dividends ― 2018/19
  • Tax rates for salary and dividends ― 2017/18
  • Tax rates for salary and dividends ― 2016/17
  • Tax rates for salary and dividends ― 2015/16

For owner-managers, 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:

  • ensure sufficient distributable reserves for payment of dividends, not only to satisfy immediate requirements but also taking into account future plans
  • requirement for shareholder / external investor approval under terms of Company’s Articles of Association / Shareholder’s agreements, etc
  • regulatory / industry requirements and guidelines relating to director’s remuneration
  • Companies Act requirements regarding declaration and documentation of dividends
  • timing and mechanics of payment of tax (see further guidance below)
  • the application of the National Minimum Wage Act (see further guidance below)
  • maintaining credit record for eligibility to receive the state pension (see further guidance on this below)
  • whether there are any mortgage or insurance products which the proprietor purchases which are affected by the form of remuneration

All of this remains true notwithstanding the changes to the taxation of dividend income from 6 April 2016. With effect from that date, the way in which dividends received by individuals changed fundamentally. In most cases this will result in higher effective tax rates for owner-managers extracting profits by way of dividends.

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

More on Extraction of profit: