This is a question we often get asked. And to be honest, quite understandably too as it is one question that causes a lot of confusion for small business owners who trade through a limited company.
What are dividends?
Dividends are an alternative way of paying yourself using the profits from your company. Limited companies can issue dividends at the end of the financial year (final dividends), and at points throughout the year (interim dividends), which is common when the directors or shareholders rely on this for income.
As long as your company is making a profit, or has reserves from previous years, you should be able to draw dividends to top up your monthly salary. Your company does not need to pay tax on dividend payments, but shareholders may have to pay Income Tax if they’re over £2,000. However, you cannot count dividends as business costs when you work out your Corporation Tax.
Dividends work differently than a PAYE (Pay As You Earn) salary because they are not liable for any National Insurance and you pay less Income Tax than a salary.
So despite paying corporation tax (currently 19%) this makes them a very attractive option for many directors. As an employee taking a salary, you are liable for tax and National Insurance contributions, which will be taken as a proportion of your earnings.
Tax on Dividends (above your allowance)
The tax you pay depends on which Income Tax band you’re in.
|Tax On Dividends
To find out your tax due, add together your income from dividends to your other taxable income to work out your tax band.
The personal allowance rate for salary rose from £11,850 to £12,500 in April 2019 and the dividend allowance remained at £2,000.
These changes mean that it could be more beneficial to pay yourself a slightly larger salary and reduce your level of dividends.
For this example, we compare the income after taxes for three scenarios, all of whom have earned £80,000 in gross contracting fee income.
- is paying themselves via a salary
- has taken an £8,632 salary (2019/20 NiC Primary Threshold) and is taking the rest in dividends, and
- is splitting the income via salary and dividends between two equal shareholders
||Gross profit before tax
||Tax Sub Total
||Net profit, therefore dividends payable
||Tax on dividends
||Income After Tax
If you would like us to calculate which formula of salary v dividends is better for you, please contact us at [email protected] but please remember….
Focus on your business and making as much money as possible – tax is a consequence of being profitable and shows you and your stakeholders that the business is doing well.
You want to grow your business, but how?
Your available operating expenses are taking up in the day-to-day running of the company. You can see a pipeline forming, yet you don’t have the staff to meet the fulfilment of the work that is on the horizon.
The team at the Finance Department have recognised that as a small business wanting to grow, cashflow is often the problem. Being able to get enough money in the bank to fund marketing, staff, equipment, office space etc. is a challenge. And when the ‘Oh my goodness I need more staff / a new computer / bigger office’ comes, what do you do?
To help make your business growth journey smoother and easier, we have teamed up with Capitalise to offer you a financing solution that could see your business steam ahead of your competitors.
It can be a minefield trying to find a lender whose experience and lending criteria matches the specific needs of your business. As a trusted partner of Capitalise we can support your business needs by matching up your business financial requirements with specialist lenders within your industry.
Being a Capitalise partner, we have access to over 300 finance lenders so whether you’re looking for additional finance to complete a merger, a new business acquisition, or simply need some working capital to keep your company ticking over, we can help to match you with a specialist lender that meets your cashflow and business needs.
The Finance Department is delighted to be a Capitalise partner offering you a financing solution that can take your business to the next level.
Just a few ways business finance can help:
• If you want to invest in new equipment, but don’t have the funds, asset finance could be a cost-effective way to fund purchases and spread the cost of equipment over its economic life. We have lenders specialising in hire purchase, leasing and refinancing.
• Invoice finance allows you to use your business invoices to get paid up to 95% of their outstanding amount upfront. Payment can be quick with invoice finance – usually in under 24 hours, one approved for the facility.
• A merchant cash advance also offers quick access to capital and is an established alternative to traditional bank loans. You use your credit card transactions to secure funding – and pay back a small percentage when your customers pay with a credit or debit card.
• With trade finance, you use your purchase orders to get funding. Our lenders will fund your suppliers upfront based on confirmed orders and finished goods. Funding can be received in a few business days, once approved for the facility.
• Working capital finance is intended for everyday business costs such as salary payments. Working capital loans are an easy and hassle-free way to secure funding and again, once approved for a working capital loan, funding can be received in just a few business days.
• Property finance has become a staple form of funding that now features in almost every commercial property purchase or redevelopment project. You’ll also have access to rapid bridging loans, development and commercial finance.
For more information about how you can grow your business, please get in touch and we will be happy to help. Not only can the Finance Department help with finding the right financing solution for your business, but we can then complete the plan, budget and forecast for you to really make a difference.
IF YOU WOULD LIKE TO EXPLORE HOW WORKING WITH THE FINANCE DEPARTMENT CAN HELP YOUR BUSINESS GROW, CONTACT US HERE OR CALL ON 01392 495483