Salary vs Dividends – is there a winner?
A popular strategy for company owners is to pay themselves a small salary and use the rest of their income as dividends.
However, this tax planning technique has seen dividends subject to PAYE and National Insurance.
In fact, there is a growing concern that there will soon be a rule for any employer that pays dividends to its staff.
So the following information will outline any potential dangers that may see HMRC strike action.
A dividend is a type of payment made by a company to its shareholders from profits.
Dividends can be issued as cash payments, shares of stock or other property.
Salary vs Dividends: The Potential Dangers
The dangers will only arise for company owners that use aggressive tax planning techniques that HMRC do not agree with, for example:
- Unrealistic arrangements in which dividends are created purely for tax avoidance purposes
- Director loans that are randomly written off and just taxed as dividends
- Dividend waivers that are tactically used to divert income to other shareholders
- ‘Alphabet’ shares that have no considerable rights other than to dividends
- Situations that show salaries have been dramatically reduced in favour of dividends
The severity of this state of affairs could change at any time. HMRC may try to tax your dividends as earnings, sooner or later.
Therefore, a small salary/big dividends tax planning technique does not guarantee tax savings.
For more information, we provide a Business Consultation to fulfill all your business needs.
We have created several posts surrounding the small salary, big dividends tax planning technique including potential dangers, non-tax factors and National Insurance for further reading here.