Salary or Dividend? Which is right for you?

How you decide to take your income will depend on a number of factors and it's important to seek professional advice before committing to a strategy.

One option is to draw a salary within the personal allowance that preserves entitlement to the state pension. For example, a salary of £8,060 is within the personal allowance, builds state pension entitlement and is below employer/employee national insurance contributions (NICs).

The remaining income can be taken as a dividend.

Dividends

The current tax-free allowance for dividend income is £5,000. If dividend income is above the allowance, you’ll be taxed at the following rates:

● 7.5% - basic rate

● 32.5% - higher rate

● 38.1 additional rate

Things to consider

Income tax and employee & employer NICs are also due on salaries above certain thresholds. In comparison tax on dividends is not deducted at source and is paid through self-assessment. Salaries are a tax deductible cost which will reduce the amount of corporation tax due, whereas dividends are paid out of profit. Dividends can't be included as business expense so there is no corporation tax saving.

Other points to consider:

● salaries are collected at different rates while dividends remain fixed

● dividends can only be paid out from earnings during the financial year while salaries can be

paid at any time through PAYE

● NICs is deducted from salaries on a monthly basis, tax on dividends is paid within 9 months

of the company's accounting period.

Need the cash now?

If you don’t need the actual cash in your pocket now or in the near future, perhaps investing some into a pension is an option for you.

Contact us:

We can help you the most tax efficient choice for your set of circumstances. We offer bespoke solutions so why not give Ping a ring on 01256 769792 to speak to an adviser or email us at info@pingca.co.uk.