Dividends instead of Salary… don’t do it !
There’s only one reason to pay yourself Dividends instead of Salary… to avoid a bit of tax / NI… but here’s 5 reasons not to…
Dividends are not ‘relevant earnings’ for pension purposes.. so payments into your pension can’t be deducted from any Dividend income… but they can be from any Salary
Salary makes your affairs simpler, clearer… with tax paid as you go along… minimising lumpy shocks & payments of extra tax in January & July
Funders don’t really get you paying out their money as Dividends… try telling some of them you’re paying yourselves that way to avoid paying some tax & see how they like it… particularly if you’re trying to raise new money… (I know a Bank Manager who absolutely hates it)… and if you’re looking to work with Venture Capitalists & Angels they’ll often put constraints on the company paying out Dividends
R&D tax reliefs are now so generous that companies will often forego a Grant to keep the tax relief… a Salary for someone working on R&D (that’ll be you too as the company Owner Manager) attracts a lot of relief… Dividends don’t count
Overdoing the Dividends can turn ‘Profits to Losses’… not strictly so… but taking out too many Dividends in any one year can shrink your Balance Sheet… making it look like your company made a loss… when it may have made a Profit… which’ll hurt your Credit Ratings
So… as the tax regime around Dividends gets tightened up… and the smell around some forms of avoidance gets stronger… maybe it’s time to have a word with your accountant… and make sure your Dividend payment policy still suits you…?
Source Documents & Calculators
Cracking Tax Calculators to play with
Simple explanation of Pension & Divs for tax year April 2017 and how the company can make tax deductible contributions to your pension… even if your low Salary means you can’t
The picture with this post comes from Salary Versus Dividends & Other Tax Efficient Profit Extraction Strategies: Written by Nick Braun
