Salary or dividend - what's best when you work for the family firm?
QUESTION: Should I pay myself a dividend from my family company or am I better paying myself a salary?
ANSWER: As a shareholder in a company it is possible to take advantage of a number of tax planning opportunities which are not available to other business structures. Many entrepreneurs take a mix of salary, bonus and dividend.
One of the main benefits of extracting profits by way of dividend is that, unlike salary and bonuses, they are not subject to national insurance contributions. In comparison if you pay yourself a salary or bonus the company will be exposed to national insurance rates of up to 13.8 per cent and you are also likely to become liable to national insurance on this income at a maximum rate of 12 per cent.
Another benefit of paying yourself a dividend, in comparison to an increased salary payment, is that you have complete flexibility on when or whether you declare the dividend in any tax year.
Salary payments are less flexible. It is therefore very common for shareholders in a family company to pay themselves a certain amount of salary and if profits and company reserves are good in a particular tax year they often declare a dividend payment which supplements their salary.
The decision on how much dividend or salary to pay yourself will vary depending on your personal circumstances. The current 2018/2019 personal tax-free allowance is £11,850, so if your salary is less than this level you will incur no PAYE income tax charges. The maximum salary which can be paid free from PAYE is slightly lower than this if your company is ineligible to reclaim the Employment Allowance.
The position for national insurance is slightly different. Once a salary exceeds £162 per week, which equates to £8,424 per annum, your company will be liable to pay national insurance at a rate of 13.8 per cent. You will also personally pay 12 per cent national insurance on any salary paid which exceeds £162 a week.
There are many factors which should be considered when deciding how much of your income should be derived from salary and how much from dividend payments.
One such factor relates to your state pension. If you reduce your salary to a low level and substitute it by way of dividend you may affect your state pension entitlement so this should be checked in advance of carrying out salary and dividend tax planning.
It is also necessary to check if changes to your method of remuneration will impact any contributions you make to a personal or company pension scheme.
From a legal perspective, before adjusting salaries advice should be sought to ensure that all employees, including yourself, adhere to minimum wage legislation in accordance with any contract of employment which may be in place.
Finally, to ensure that the declaration and payment of a dividend is legal it is necessary to ensure that the company has adequate reserves in order to make the payment. If in any doubt you should check this with your accountant.
All limited company owner-managers should regularly review how best to structure their income – whether by salary, bonus or dividends. Changing tax rates, fluctuating incomes from year to year, and the year in which income is taken can all affect how much tax you pay and when you have to pay it.
:: Janette Burns (firstname.lastname@example.org) is associate director at PKF-FPM Accountants (www.pkffpm.com). The advice in this column is specific to the facts surrounding the question posed. Neither The Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.