use dividend payments instead of For the majority of small to medium sized business, it is essentially a well-known approach to make use of dividend payments as opposed to high bonuses as a way to help save tax bill for the managing shareholder. The savings in this regard come from the fact that employee and employer N. I. is normally payable on earned income whereas there is no NI on dividends. In instances in which the owner of a Ltd Company also happens to be an employee in the business they have the option to extract their remuneration either in the form of dividends through their capacity as shareholders or salary as they are employed by the company or a blend of both. The majority of accountants, such as Alexander Ene primarily use this tactic in situations that small companies rate of corporation tax is applicable. In the absence of earned income, there would be zero National Insurance . Consequently the question is why then pay a salary in any respect? Why not basically pay all of it out as dividend and avoid the NI pitfall completely? Basically the answer happens to be in what we get as a result of paying National Insurance. Our N.I. Contribution affects much of our entitlement to state benefits for instance retirement pensions, statutory sick pay, statutory maternity , statutory paternity pay, etc. The thing with National Insurance and the gains most of us derive out of it is the fact that levels won't be directly proportional. On the other hand the actual contributions are actually directly proportional with the taxable income. Following from the above, after a specified level of National Insurance , hardly any more added benefit will accrue from further payment. Usually the ideal amount of earnings needed to attain this benefit level is determined by individual situations. Commercial enterprise owners, like every one else need to have earnings on a regular basis. Having worked out what annual salary a person will need, you need to make up the remainder by way of dividend. In establishing the regular dividend level, it's critical to ensure that you don't exceed the legal limit. The appropriate limit here simply refers to the sum that makes certain that dividends are usually only paid using distributable reserves. Usually the distributable reserves of a firm will be the built up income less it's accrued losses. The primary hazard of exceeding beyond the distributable reserves is the fact that HMRC will dispute that the extra are loans to directors and this can complicate issues. Thus, while dividend is the much more tax efficient way to extract salary from your business enterprise, it's essential that the company proprietors ensure that the dividend amounts do not go beyond the firms accummulated profits. This is an illustration of a basic income tax planning method that can legitimately save a company tax. Though it should be borne in mind that this specific tax planning strategy is purely relevant to incorporated businesses. It can also be a very good reason why anyone that is running a business in the form of sole trader or unincorporated partnership should consider switching their
business entity to a Ltd Company. This is even more relevant if the business is generating a sizable profit margin. This is something which any general practice accountancy firm should be able to advice about. Ensure that you consult professionally qualified accountants in Finchley before putting into action any of the ideas on this post since they really are very dependent on individual variables.
Published on Feb 28, 2014
For many small to medium sized business, it is pretty much a well-known technique to use dividend payments instead of increased bonuses as a...