Business Tax: Salary versus Dividends

Salary versus Dividends by By Carl Bayley BSc ACA

PUBLICATION DATE: SEP 2010
PAGES: 314
ISBN: 9781907302299

Overview of Salary versus Dividends

This unique tax guide shows company directors how to save thousands of pounds in tax by choosing the best mix of salary, bonus and dividends. It is essential reading for everyone who runs a limited company.

Tax Tip
The salary versus dividends question has been drastically altered by recent tax changes. Increasingly, the question is no longer just about whether to pay yourself salary or dividends but when to pay them and how much.

Other options, like directors loans, have also opened up, giving company directors the chance to make massive tax savings through the timing and structure of their pay.

This guide tells you exactly what to do. Clear conclusions and easy to follow tables show you the best pay structure in almost every situation.

What information is contained in Salary versus Dividens?

Salary versus Dividends is written in plain English and contains many practical examples.

Subjects covered include:

• How to reduce ALL the taxes paid by company owners: income tax, national insurance, corporation tax and capital gains tax.
• How to choose the best mix of salary and dividends for YOU.
• How to extract the maximum TAX-FREE money from your company this year.
• Why paying a small salary actually saves money and when it’s worth paying a little national insurance to save even more.
• Exactly how much in tax-free dividends you can take this year.
• The cash flow benefits of dividends, why they are under threat and how you can safeguard them.
• The even greater cash flow benefits of paying dividends every second year.

• How to avoid national insurance – the Government’s favourite money spinner.
• Why changing your pay date can boost your cash flow.
• How to ‘pay’ salaries/dividends without extracting money from your company and why this could save you tens of thousands of pounds.
• How to maximise corporation tax relief on bonus payments.
• Why and how you should pay yourself extra this year.
• Dangers to watch out for: what do ‘Arctic Systems’ and ‘income-shifting’ mean for you?
• Why your company’s accounting date affects your optimal pay structure.
• Sample documentation to help you keep the taxman happy.

• How to avoid national insurance – the Government’s favourite tax on work.
• How changing your pay date can give you a vital cash flow advantage.
• How to ‘pay’ salaries or dividends without taking cash out of your company and why this could ultimately save you tens of thousands of pounds.
• How to get early corporation tax relief for bonus payments – even before PAYE is due!
• Advanced tax planning strategies for high income earners.
• How high earners can safeguard their tax-free personal allowances by accelerating or deferring income.
• How, when and why you should pay yourself extra this year – plus how to work out how much to pay.
• Loans to directors – the benefits of borrowing from your own company, how to do it legally and how to do it most tax efficiently.

• How and when to borrow from your company to save or defer thousands of pounds in tax.
• What to do if your company is making a loss and how to use the new loss relief rules to get bigger tax repayments.
• How your optimum pay structure is affected by other income you receive, including rent, pensions, interest and income from other investments.
• Why paying interest on a loan account is often better than salary or dividends.
• The benefits and pitfalls of paying yourself rent.
• How to structure your pay when you’re claiming tax credits.
• How to pay yourself an extra £25,000 and still claim tax credits as if you hadn’t.
• Using your spouse or partner to help achieve further tax savings.
• How to deal with minority shareholders and still make sure your pay is tax efficient.
• The best strategy for family companies owned by brothers and sisters or other relatives.
• How to structure your pay when you pass the state retirement age.
• How the national minimum wage affects directors’ pay and how to make sure it doesn’t.
• How making pension contributions affects your optimum pay decision.
• Capital gains tax planning strategies for company owners.

A very useful feature of this guide is a set of tables produced by our experts. These tables make choosing the optimal mix of salary, bonus and dividends a piece of cake even for those with no prior experience.

Taking into account all aspects of you and your company’s tax situation including income tax, corporation tax, and national insurance paid by both you personally and by your company, it has never been easier to attain an effective, efficient fund management system for your business.

About the Author of Salary versus Dividends

The Author of Salary versus Dividends is Carl Bayley BSc ACA. Carl’s speciality is his ability to take the complex world of taxation and set it out in the kind of clear language that taxpayers can understand. Carl is also a regular contributor to TV programmes such as the BBC’s It’s Your Money programme and national newspaper articles on tax matters. He is a member of the governing Council of the Institute of Chartered Accountants in England and Wales.

Contents of Salary versus Dividends

Chapter 1 Introduction
1.1 Why is the Salary/Dividend Question So Important?
1.2 Which Companies are Affected?
1.3 Marginal Rates and the Inevitable Trade-Off
1.4 What’s the Difference?
1.5 Salary or Bonus?
1.6 Scope of this Guide
1.7 About the Examples
1.8 A Quick Answer
1.9 A Second Role

Chapter 2 How are Companies & Directors Taxed?
2.1 Corporation Tax Relief
2.2 Corporation Tax Rate Changes
2.3 Effective Corporation Tax Rates
2.4 Marginal Tax Rates for Directors
2.5 Tax Years
2.6 Tax Payable on Salaries and Bonuses
2.7 Tax Payable on Dividends
2.8 Dividend Tax Credits
2.9 Maximum Tax Free Payments
2.10 Employer’s National Insurance Contributions
2.11 What do Salaries and Bonuses Cost?
2.12 What do Dividends Cost?
2.13 Cashflow Considerations
2.14 Cashflow Impact of Salaries and Bonuses
2.15 Cashflow Impact of Dividends
2.16 Dividends and PAYE
2.17 Salary and Bonus Payments to Non-Directors
2.18 Directors with Other Income
2.19 The Impact of Other Income on Dividends
2.20 Other Factors Affecting Tax on a Salary or Dividend

Chapter 3 The Taxcafe Computer Model
3.1 Introduction to the Model
3.2 Model Results 2010/2011
3.3 Interpreting the Model
3.4 Bonus Cost Increases
3.5 Model Conclusions
3.6 Overview of Model Recommendations

Chapter 4 Planning Dividend or Bonus Payments
4.1 Planning for Profit
4.2 Using This Chapter
4.3 Small Companies: Profits Not Exceeding £300,000
4.4 Medium-Sized and Large Companies:Profits Exceeding £300,000
4.5 Escape!
4.6 Planning a Payment
4.7 Planning a Complex Payment
4.8 The Cost to the Company
4.9 Dividends Taking Directors’ Taxable Income Over £100,000
4.10 Large Payments to Directors of Small Companies
4.11 Large Payments to Directors of Medium-Sized or Large Companies
4.12 Summary

Chapter 5 Bottom-Up Planning
5.1 A Clean Sheet
5.2 Maximum ‘Tax-Free’ Payments
5.3 Retaining the Director’s Personal Allowance
5.4 Small Companies: Profits Not Exceeding £300,000
5.5 Medium and Large Companies:Profits Exceeding £306,572
5.6 Medium-Sized Companies: Profits between £300,001 and £305,714
5.7 Medium-Sized Companies:Profits between £305,715 and £306,572
5.8 The Bigger Picture

Chapter 6 Timing Your Payments
6.1 Accelerating Corporation Tax Relief
6.2 Timing Dividend Payments
6.3 Maximising Corporation Tax Relief
6.4 Spreading the Cost
6.5 Delaying Payments
6.6 A Glimpse into the Future
6.7 Forecast Model Results 2011/2012
6.8 Overview of Model Recommendations for Payments Made in 2011/2012
6.9 Accelerating Payments

Chapter 7 Using Loan Accounts
7.1 Exploiting Tax Advantages
7.2 Lend to Save
7.3 Medium-Term Benefits
7.4 Long-Term Benefits
7.5 Very Long Term
7.6 Interest on Loan Accounts
7.7 An Interesting Strategy
7.8 Compound Interest
7.9 Loan Account Limitations
7.10 Accruing Interest

Chapter 8 Loans to Directors
8.2 The Section 419 Charge
8.3 The Benefit in Kind Charge
8.4 Saving Tax with Loans to Directors
8.5 Deferring Tax with Loans to Directors
8.6 Longer-Term Loans
8.7 Loans versus Dividends for High Earners
8.8 Loan Waivers
8.9 Loans versus Bonuses

Chapter 9 Multiple Owners
9.1 Background
9.2 Corporate Couples
9.3 Unequal Couples
9.4 Bottom-Up Planning for Couples
9.5 Other Co-Owners
9.6 Family Companies
9.7 Minority Shareholders
9.8 Company Budgets
9.9 The Composite Rate Approach

Chapter 10 Companies With Different Tax Rates
10.1 Associated Companies
10.2 What is an Associated Company?
10.3 Short Accounting Periods
10.4 Long Accounting Periods
10.5 The Corporation Tax Threshold Formula
10.6 Loss-Making Companies
10.7 Close Investment Holding Companies

Chapter 11 Older Directors
11.1 Privileges of Age
11.2 Age-Related Allowances
11.3 Withdrawal of Allowances
11.4 National Insurance for Older Directors
11.5 Marginal Tax Rates on Salaries and Bonuses for Older Directors
11.6 Directors Aged 65 or Over
11.7 Female Directors Aged 60 to 64
11.8 When I’m 64
11.9 Younger Directors with Older Spouses
11.10 Older Directors with Savings Income
11.11 Older Directors with Other Dividend Income
11.12 Marginal Rates on Dividends for Older Directors
11.13 The Taxcafe Computer Model for Older Directors 2010/2011
11.14 Planning Payments to Older Directors
11.15 Pensions

Chapter 12 Directors with Children
12.1 The Impact of Tax Credits
12.2 Working Tax Credits
12.3 Child Tax Credits
12.4 Childcare Costs
12.5 The Family Element
12.6 The Income Disregard
12.7 Tax Credits and Salary or Bonus
12.8 Tax Credits and Dividends
12.9 The Taxcafe Computer Model: Directors with Children
12.10 Model Conclusions for Directors with Children

Chapter 13 Making Payments to Directors and Shareholders in Practice
13.2 Commercial Considerations
13.3 Impact of Dividends on Share Value
13.4 Justifying Salaries or Bonuses
13.5 Paying a Dividend
13.6 Frequency and Amount of Payments
13.7 Paying Dividends in Practice
13.8 The National Minimum Wage
13.9 State Pension Entitlement
13.10 Interest Charges
13.11 Non-Cash Payments

Chapter 14 Pension Contributions
14.1 The UK Pensions Regime
14.2 Company Contributions
14.3 Personal Pension Contributions

Chapter 15 The Third Way – Capital Growth
15.1 Maximising Capital Growth
15.2 Entrepreneurs’ Relief
15.3 What if Entrepreneurs’ Relief is not Available?
15.4 Guiding Principles

Chapter 16 Other Important Points
16.1 Personal Service Companies
16.2 Income Shifting: The Gathering Storm?
16.3 Business Property Held by Directors
16.4 Directors with Other Income

Appendix A Tax Planning Tables
Appendix B Sample Documentation
Appendix C Tax Rates and Allowances
Appendix D Corporation Tax Rates

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