Individual Variances

We’re going to discuss two common methods for taking income from a UK business – a salary, and a combination of salary and dividends.

There are many factors which influence what is best for an individuals circumstances so we are going to make the following assumptions;

• The director owns the business outright.
• The gross pay will be £50,000 in both scenarios.
• The director has no other sources of income.
• The director wants a qualifying year for the UK state pension (through National Insurance contributions).
• They make no personal pension contributions.
• The business makes £50,000 or less of profit (which are therefore taxed at 19%).

We will explore the advantages and disadvantages of each method (salary vs salary & dividends), along with their respective tax implications.

Method 1: £50,000 Salary

A salary is a fixed, regular payment made by an employer to an employee for their work.

A salary of £50,000 falls within the basic rate tax band (2023/2024 tax year). The director has a Personal Allowance of £12,570 and will pay 20% tax on the remaining £37,430 of their salary. 

They would also pay Class 1 National Insurance Contributions (NIC’s) at a rate of 12% on the earnings between £12,570 and £50,000.

The business will also pay employer’s NIC’s of 13.8% on the earnings between £9,100 and £50,000.

In total, the tax position and net income will look like this;

• Gross Income = £50,000

• Employee NIC’s = £4,491.60
• Income Tax = £7,486
• Dividend tax = £0
• Employer’s NIC’s = £5,644.20
• Corporation tax = £0

• Total cost to the business = £55,644.20
• Director takes home = £38,022.40 (£3,168.53 per month)

Method 2: Combination of Salary and Dividends

In this method, the director would receive a salary of £12,570 and the remaining £37,430 would be paid as dividends, keeping the total gross income at £50,000.

A salary of £12,570 gives you a couple of things;

• Enough income for a qualifying year for National Insurance.
• Low enough income to not have to pay employees NIC’s (there’s still a small employer’s NIC’s to be paid).
• No income tax to pay.

Of the £37,430 of dividends £1,000 is tax-free as it falls within the dividend allowance for a basic-rate taxpayer.

The remaining £36,430 will be taxed at 8.75%.

The director needs to remember that as he is the sole owner of the business, corporation tax is due after corporation tax and can be only paid out of profits.

In total, the tax position and net income will look like this;

• Gross Income = £50,000

• Employee NIC’s = £0
• Income Tax = £0
• Dividend Tax = £3,187.63
• Employer’s NIC’s = £47.88
• Corporation Tax = £6,921.70

• Total cost to the business = £56,969.58
• Director takes home = £46,812.37 (£3,901.03 per month)

Conclusion

In this specific set of circumstances, a salary plus dividends means more money goes into the directors pockets.

Ultimately, the choice between these two methods will depend on a director’s individual preferences, financial goals, and the company’s performance. It’s crucial to weigh the pros and cons of each option and consult with a financial professional to make an informed decision.

If you’d like us to be the financial professional that helps you decide what’s best for you and your companies circumstances, please fill out the form on the contact page or email us on contact@amc-accountancy.co.uk