Salary vs. Dividends:
Reduce Tax and Increase your Net Pay
(Utilising the Spouse Allowance)
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If you are a shareholder, you may have the option to remunerate yourself by way of dividends rather than taking a significant salary and this can give rise to substantial savings for you individually as well as for your company.
If you are married, then there is further scope to reduce the tax liability by utilising the position of the wife or husband.
The benefit of dividends
Salary is subject to both income tax and national insurance but usually also provides a corporation tax deduction. Salary up to the amount of the earnings threshold (£7,488) can be paid free of national insurance for both the employee (12%) and employer (13.8%). Provided that other income does not exceed £617, this salary amount will also be free of income tax.
Where a salary of £7,488 is paid, a further sum of up to £31,488 can be extracted as a tax-free dividend (subject to any other income which the director has). This combination gives the director/shareholder the maximum total tax-free income for 2012-13 of £38,976.
To put that into perspective, that is equivalent to the net take home pay received by an employee on a salary of over £56,000. A couple owning a company together could ‘double up’ their tax free income to £77,952. One person alone would need a salary of over £127,000 to receive this much net pay!
The Accountancy Coop recently undertook a review of a director’s remuneration on behalf of the company.
The director was married and earned a salary of £70,000pa, while his wife had minimal annual income. As the director was also a shareholder of the company we were able to implement a strategy that reduced his salary in favour of dividends, resulting in savings of approximately £14,000pa.
We were also able to further reduce the director’s tax liability by transferring an element of his shareholding into joint names resulting in additional savings of £3,000pa.
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