Business Tax: Salary versus Dividends

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Salary versus Dividends

by By Carl Bayley BSc ACA

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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 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 92
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 
8.1 Legalised!
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 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 Computer Model: Directors with Children
12.10 Model Conclusions for Directors with Children

Chapter 13 Making Payments to Directors and Shareholders in Practice 
13.1 Welcome to the Real World
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
Disclaimer

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