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Taking the money
If you own a business, it is likely to be a sole trade, a partnership or a company. Limited companies have generally paid a lower rate of tax on profits than unincorporated businesses, and recent changes have encouraged more traders than ever to switch to this business vehicle. But there is a problem - the company's money has to be kept separate from the owners' money, and taking it out of the company has tax consequences. So what is the best way of doing that? You have a basic choice between salary and dividends, with the further possibility of awarding yourself benefits in kind, or "perks".
The last few years have seen this grow more and more complex. This year's National Insurance increases have made salary less attractive. In general, dividends (with no
NIC) are less heavily taxed. But there are problems with dividends - they have to be paid to the shareholders in proportion to their shareholdings, and they may not be the people who deserve the money. There are also Companies Acts rules to follow before a dividend is lawful.
If you and your records are not clear about which route you have taken - if you just pay yourself some money, and think about it afterwards - it's likely to be the worst of all possible worlds for tax. The Inland Revenue can impose interest charges and penalties for getting it wrong.
So, if you are running a business in a company, we will be happy to advise you on the best way of getting the money out, and on getting the paperwork right. Then you can concentrate on earning it!
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There is an article in Taxation magazine, 21 August 2003 p562, which analyses the different tax rates applicable to dividends and salary. It concludes that the only situation in which salary is cheaper than dividends is when the company is a "marginal small company" (profits between £300,000 and £1.5m a year) and the recipient is a higher rate taxpayer - and even then, the difference is very small.
There are several chapters in Tolley's Tax Planning which deal with the use of benefits in kind in tax planning, including those dealing with directors' and employees' remuneration, occupational pension schemes and NIC planning. The essence of good benefits planning is to give the employee something on which the tax charge is lower if provided directly than if cash is given for the employee to buy it. There are too many examples to list here, but they range from subsidised meals through overnight allowances to pension contributions.
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