By Emma Wilson, Partner
While much discussion of dividends and shareholders is focused on large companies conducting their business in towering skyscrapers, it is possible for the owners of Small and Medium-sized Enterprises (SMEs) to leverage dividends as a tax-efficient way of boosting their earnings.
Your hard work is the reason for your business existing and growing, so it is worth considering the ways that you can benefit from all the effort you put in.
There are important tax considerations to keep in mind when determining the best way to take your pay.
Dividend’s Tax vs Income Tax
It is worth highlighting that there is some tax culpability on dividends.
Much like income tax, the dividends tax is split into three thresholds, which are currently:
| Basic rate | 8.75 per cent | On earnings from £12,571 to £50,270 |
| Higher rate | 33.75 per cent | On earnings from £50,271 to £125,140 |
| Additional rate | 39.35 per cent | On earnings over £125,140 |
Just as a refresher, these tax rates are more forgiving than those on Income Tax, which are currently:
| Basic rate | 20 per cent | On earnings from £12,571 to £50,270 |
| Higher rate | 40 per cent | On earnings from £50,271 to £125,140 |
| Additional rate | 45 per cent | On earnings over £125,140 |
In general, you have a Personal Allowance of up to £12,570 on which you pay no tax.
Tax-efficient payments
Dividends can only be paid from the company’s profits, so this does limit the applicability in situations where your business is loss-making or breakeven.
If you find the payment of dividends particularly beneficial, it could be worth trying to maximise the profitability of your business so that you can benefit more from them.
Even if your business is not yet turning a profit, it is worth familiarising yourself with the different ways that business growth can benefit you.
If you are in a position where your profits will be comfortably over £12,570, then it would be worth splitting your pay between a fixed salary and payment in dividends.
Due to the tax-free nature, there is no reason not to take a £12,570 salary.
Any amount that you wish to pay yourself above this is best taken as dividends due to the substantially lower rate of tax.
This will ensure that you pay less tax on your earnings, thus making you feel a greater benefit from the hard work you have invested in your business.
It is worth noting that you may still be in line for some National Insurance considerations, but exploring your options and the applicability of the National Insurance Employer’s Allowance may help mitigate even this.
Different forms of payment work best for different individuals depending on their situation.
Just as you guide your business to growth and success by considering a range of options, you can explore the best ways to reward yourself as well.
We are on hand to guide you through the process of running a business in a way that is tax-efficient and fiscally responsible.
Take control of your finances by speaking to our team today.