For many Small to medium sized Organization, it is pretty much a widespread approach to utilize dividend rather than high wages as a way to help save tax for the working investor. This kind of tactic is true in circumstances where the lower rate of corporation tax applies. All the savings in connection with this comes from the fact that NI is normally due on salaries however, not dividends.
Without earned income, there is going to be zero National Insurance . And so the question is why then pay a wage at all? Why not basically pay it all out as dividend and steer clear of all the NI trap entirely? Well the answer happens to be in what we get from paying National Insurance.
Our N.I. Contribution has a bearing on our entitlement to state benefits such as pension, statutory sick pay, statutory maternity pay, , and so on.
One thing with National Insurance and the gains we get from them is that the amounts aren't directly proportional. Even so your contributions will be directly proportional with the taxable salaries.
It follows from above that after a certain amount of National Insurance , hardly any extra benefits could accrue out of additional payment. An ideal level of salary needed to attain that highest benefit level depends upon personal circumstances.
Company owners, just like any one else need money on a regular time frame. Having worked out what annual salary you require, you want to make up the remainder by way of dividend. In setting the regular dividend amount, it is critical to make sure that you don't exceed the legitimate limit.
The authorized limit here just refers to the quantity that ensures that dividends are only paid from distributable profits. The distributable reserves of a Business would be the built up profits less it's accumulated deficits. The primary danger of exceeding beyond the distributable profits is that HM Revenue & Customs can argue that the excess are advances to directors and this can complicate things.
Thus, whilst dividend is a much more tax efficient route to extract money from a company, it is essential that the business proprietors ensure that the dividend amounts don't go over the firms distributable profits.
Author Resource:
Roscoe can be described as chartered certified accountant with several years' practical knowledge of advising individuals and businesses with regards to their financial and taxation affairs. He is a senior partner in a firm of contractors accountant based in London, uk. In addition to working for IT contractors accountants Roscoe regularly writes on subjects connected with accounting and taxes.
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