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Dividend v salary v pension revisited

Part 2

In this second article we examine, with examples, a few typical situations that put some numbers behind the general consideration of the relative position of dividends or salary as the most effective means of withdrawing money from a company for shareholding directors.  But before doing so we would point out that since the first article was written, the Finance (No2) Bill 2017 received Royal Assent.  One of the clauses in the Bill that was omitted from the Act was the one to reduce the dividend allowance from £5,000 to £2,000 with effect from tax year 2018/19.  We must wait until after the June General Election to see whether the new government will legislate for the reduction.

Examples of some typical situations 

Example 1: One-person company wanting to keep income within basic rate band: no employment allowance available

Table 1.1

Salary Only

£

Salary + Dividend

£

Gross profit

50,083.37

53,640.54

Employer NICs

(5,083.37)

Nil

Salary

45,000.00

8,164.00

Corporation tax @ 19%

Nil

(8,640.54)

Dividend

Nil

36,836.00

Gross income

45,000.00

45,000.00

Dividend allowance

 

(5,000)

Personal allowance

(11,500)

(11,500)

Taxable income

33,500

28,500

Employee NICs

(4,420.32)

Nil

Income tax

(6,700.00)

(2,137.50)

Net income

33,879.68

42,862.50

In this example, the dividend route benefits from both the £5,000 dividend allowance and the £3,336 of unused personal allowance (£11,500 - £8,164). As explained in the first article, suffering 19% corporation tax on the dividend is better than salary that suffers no income tax but 25.8% employer/employee NICs, of which only the employer's is tax-relieved. The extra net income of £8,982.82 comes with a greater slice of the profit. If the gross profit is kept the same for salary and dividend, the table looks like this:

Table 1.2

Salary Only

£

Salary + Dividend

£

Gross profit

50,083.37

50,083.37

Employer NICs

(5,083.37)

Nil

Salary

45,000.00

8,164.00

Corporation tax @ 19%

Nil

(7,964.68)

Dividend

Nil

33,954.69

Gross income

45,000.00

42,118.69

Dividend allowance

 

(5,000)

Personal allowance

(11,500)

(11,500)

Taxable income

33,500

25,618.69

Employee NICs

(4,420.32)

Nil

Income tax

(6,700.00)

(1,921.40)

Net income

33,879.68

40,197.29

Example 2: One-person + single other employee, company wanting to keep income within basic rate band: £3,336 of income covered by employment allowance

Table 2.1

Salary Only

£

Salary + Dividend

£

Gross profit

49,623.00

52,858.02

Employer NICs

(4,623.00)

Nil

Salary

45,000.00

11,500.00

Corporation tax @ 19%

Nil

(7,858.02)

Dividend

Nil

33,500.00

Gross income

45,000.00

45,000.00

Dividend allowance

 

(5,000)

Personal allowance

(11,500)

(11,500)

Taxable income

33,500

28,500

Employee NICs

(4,420.32)

(400.32)

Income tax

(6,700.00)

(2,137.50)

Net income

33,879.68

42,462.18

The bottom line is the £400.32 less than in table 1.1, but the gross profit cost is £782.52 lower because an extra £3,336 has been extracted as employee NICable salary rather than dividend. This avoids the corporation tax charge on that slice. If we repeat the calculation with the same gross profit as the salary only option, the results are as follows:

Table 2.2

Salary Only

£

Salary + Dividend

£

Gross profit

49,623.00

49,623.00

Employer NICs

(4,623.00)

Nil

Salary

45,000.00

11,500.00

Corporation tax @ 19%

Nil

(7,243.37)

Dividend

Nil

30,879.63

Gross income

45,000.00

42,379.63

Dividend allowance

 

(5,000)

Personal allowance

(11,500)

(11,500)

Taxable income

33,500

25,879.63

Employee NICs

(4,420.32)

(400.32)

Income tax

(6,700.00)

(1940.97)

Net income

33,879.68

40,038.34

We will continue this consideration of the numbers in the next article to conclude.