Dividends and Salary
Generally, shareholders opt for a combination of dividends and salary as this is generally the most tax efficient way of extracting money from the company as dividends are subject to a much lower tax rate than a salary. In addition, National Insurance Contributions are not payable on dividends.
However, dividends are not seen as an expense to the company, so they do not reduce the profit of the company whereas a salary is seen as an expense. This means a salary reduces the profit of the company thereby reducing the Corporation Tax liability. The reason for opting for the combination method is that we use part of your tax free allowance for the salary which brings the profit of the company down, thereby reducing the Corporation Tax liability and top up the wages with dividends which attract a much lower tax rate.
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