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15 March 2016
Owner-managers and contractors often pay themselves in a combination of salaries, bonuses and dividends.
A common strategy is to draw a salary of around £8,000 while also extracting profits from the business as a dividend. A salary of £8,060 (for the 2015/16 tax year) preserves entitlement to the state pension and some benefits. It is also within the personal allowance and below the threshold for employer and employee national insurance contributions (NICs).
Some people opt for a higher salary to make better use of the personal allowance and, in doing so, help lower company profits which are liable for corporation tax. This option means that the individual will have to pay NICs on any salary exceeding £8,060 and the business will have to pay employer NICs.
It is then possible to take additional income as a dividend which are generally more tax-efficient than salaries or bonuses alone. The amount of tax due on dividends depends on an individual’s income tax band.
The effective rates of tax are currently:
For the 2015/16 tax year, a business owner with a £8,060 salary and a dividend of £30,000 would not pay any tax on the dividend as their total income is within the basic rate tax band.
However, the major changes to dividends which are due to come into effect from April 2016 have made many question the salary plus dividend strategy.
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