For the majority of Small to medium sized Companies, it’s pretty much a well-known strategy to make use of dividend rather than increased wages in order to reduce tax bill for the working investor. This kind of approach can be applied in instances where the reduced rate of business tax applies. The savings in this regard comes via the fact that NI is due on earned income but not dividends.
Without earned income, there are going to be no National Insurance. And so the real question is why then pay a wage at all? Why not simply pay all of it out as dividend and prevent the National Insurance pitfall entirely? Well the answer is in what we gain as a result of paying NI.
The N.I. Contribution has a bearing on some of our entitlement to state benefits including pension, sick pay, statutory maternity , statutory paternity pay, and so on.
The thing with National Insurance Contribution and the benefits most of us derive from it would be that the amounts won’t be specifically proportional. Nevertheless the actual contributions happen to be directly proportional to your chargeable salary.
Following from the above, after a certain amount of National Insurance Contribution, virtually no further gains is going to accrue from additional payment. Usually the optimum amount of salary needed to realize this benefit level depends upon individual situations.
Commercial enterprise owners, like every one else need money on a frequent time frame. Having figured out just what annual salary you will need, you need to make up the remainder by way of dividend. When establishing the regular dividend level, it’s crucial to make sure that you don’t go beyond the legitimate limit.
The legitimate limit here basically refers to the amount that helps to ensure that dividends are usually only paid out using distributable reserves. Usually the distributable reserves of a Company would be the accumulated earnings less it’s accrued losses. The major risk of exceeding the distributable profits is usually that HM Revenue & Customs can claim that the surplus are borrowings to directors which can complicate issues.
Thus, though dividend is the more tax efficient way to draw out income from your business enterprise, it’s essential that the company entrepreneurs make certain that the dividend levels don’t go beyond the company’s distributable reserves.
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