Helpsheet

Salary vs. Dividends:
Reduce Tax and Increase your Net Pay
(Dividend Calculator 2)

Salary/Dividend – Based on tax year 2012/13 at higher rate of tax and a small company.

As a company director you can save tax by choosing the best way to draw remuneration from profits - via salary or via dividend. The most tax efficient way depends both on your personal tax rate and on the corporation tax rate.

£25,000 has been used as a remuneration figure for this calculator to illustrate the comparisons. In reality there may be other personal income to take account of, every case is different. The calculations are complex and professional advice should be taken.

Example Criteria:
Tax Year: 2012/13
Personal Tax Rate: Basic Rate (40%)
Corporation Tax Rate: Small Companies Rate (20%)

Please note that a basic salary equivalent to the basic personal allowance is included in the dividend option

 

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Working calculations:

	Salary Option	Dividend Option	Notes
Resulting Taxable Profits	£ 0	£ 25,000
Resulting Corporation Tax	£ 0	£ 5,000	= £25,000 x 20%
Available Gross Salary	£ 22,876	£ 0	( £22,876 + £2,124 ) = £25,000
Employers NI on Salary	£ 2,124	£ 0
Available Dividend	£ 0	£ 20,000	= £25,000 - £5,000

 

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Net Disposable Income of Director:

	Salary Option	Dividend Option	Notes
Dividend	£ 0	£ 20,000
Salary	£ 22,876	£ 8,105
Less PAYE Tax on Salary	£ 9,151	£ 0
Less NI on Salary	£ 1,834	£ 0
Additional Tax on Dividend	£ 0	£ 5,000	Gross Dividend £20K taxed at 32.5% Less 10% tax credit
Total	£ 11,891	£ 15,000	Dividend produces £ 3,109 more of disposable income!

 

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Breakdown of where the £25,000 goes:

	Salary	Dividend
Corporation Tax	£ 0	£ 5,000
Additional Tax on Dividend	£ 0	£ 5,000
PAYE Tax	£ 9,151	£ 0
Employee's NI	£ 1,834	£ 0
Employer's NI	£ 2,124	£ 0
To Director	£ 11,891	£ 15,000
Total	£ 25,000	£ 25,000

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More in this area:

• Pros and Cons
• Worked Example
• Dividend Calculators
• Utilising the Spouse Allowance