Saving National Insurance by paying Dividends
To see the advantages of dividends it’s important to understand how different forms of income incur tax:
- A Company employee is required to pay income tax and national insurance. For a basic rate tax payer this involves paying 20% income tax + 12% Class 1 National Insurance. Tax of 32% is therefore paid on earnings. Your employer must also pay 13.8% employers national insurance.
- A self-employed person must pay income tax on their profits and national insurance, for a basic rate tax payer this is 20% income tax + 9% Class 4 National Insurance + £2.50 a week Class 2 National Insurance. Tax of 29% (plus a bit) is therefore paid on earnings.
- A limited company owner paying themselves entirely in dividends pays income tax and corporation tax, for a basic rate tax payer this is 0% income tax (due to the dividend tax credit) and 20% corporation tax on company profits. Tax of 20% is paid on earnings.
As you can see the limited company owner is the clear winner when it comes to protecting earnings from the taxman. The level of saving varies a for higher rate taxpayers but the advantage is still very much with being a dividend receiving limited company owner.
Move on to section 2 of our Dividend Guide to see how you can reduce your tax even more by paying yourself a small salary and the remainder in dividends.
Caprica Online Accountants – Dividend guide
1. Advantages of paying yourself with dividends
2. Getting the right mix between salary and dividends
3. Understanding the dividend tax credit
4. The best way to time dividend payments
5. Illegal dividends and how to avoid them
6. IR35 and Dividends (for contractors only)
How Caprica Online Accountants can help
At Caprica Online Accountants we advise all our limited company clients on the most tax efficient way to structure their pay as part of our great fixed fee online accounting packages.