Salary vs Dividend
Salary vs Dividend – Unveiling the Tax Conundrum
In the intricate world of finance and taxation, the choices we make regarding our income can significantly impact our bottom line. One of the perennial debates revolves around the decision between taking a salary or indulging in dividends. While both are essential streams of income, understanding the contrasting tax treatments is paramount. Let’s delve into the nuances and shed light on the key differentiators.
Income Tax Labyrinth:
- Salary: 20%/40%/45%
- Dividend: 0%/8.75%/33.75%/39.35%
National Insurance Contributions (NICs) – The Double-Edged Sword:
- Individual (Class 1 NICs): 13.25%/3.25% on the salary; none on the dividend
- Company (Class 1 NICs): 15.05% on the salary (with a caveat: the £5,000 employment allowance may not apply if the director is the sole employee)
Corporation Tax Quandary:
- Salary and employer NICs: Allowable deductions from trading profits
- Dividends: Not allowable deductions
Pension Puzzles:
- Salary: Considered earned income and relevant earnings for pension contributions
- Dividends: Not earned income, hence not relevant for pension contributions
Additional Considerations for the Astute Entrepreneur:
- If a bonus is accrued at the year-end, it must be paid within 9 months of the end of the chargeable accounting period to be deductible in the period accrued.
- The company must have distributable profits for a dividend to be allowed.
Feeling lost in the fiscal labyrinth? Fear not, for TaxDigit is here to guide you through the maze!
At TaxDigit, we specialise in unraveling the complexities of tax structures and providing tailored advice to suit your financial aspirations. Whether you’re a seasoned entrepreneur or just starting on your financial journey, our experts are here to offer clarity and ensure you make informed decisions.
