Taking a salary from your company can be a complex process and is much more complicated than if you are a sole trader or partner in a partnership. It is possible to be paid through your company with dividends as a shareholder or a salary as a director. It is common practice to take a combination of both. A lower rate of tax is paid on dividends, but there may be drawbacks to consider.
Every person is entitled to receive a personal allowance each year; this is a specified amount that isn’t taxable. For the year 2011-12, the amount you can earn without paying tax is £7475. Tax credits on dividends can’t be repaid, so you will waste your personal allowance if you take all your salary as dividends. A typical practice is to take a salary that only just covers your personal allowances, and take the rest of your salary as dividends.
Being paid a small salary and paying National Insurance will also preserve your entitlement to future state benefits, like the state pension. If your company is making a loss, you may still take a salary. However, you can only pay dividends if the company is making a profit. Taking a salary rather than dividends may also reduce the amount of Corporation Tax you pay, especially if your company doesn’t pay at the small company’s rate. Deciding how much salary to take from your company, and whether to take salary or dividends is a complex matter, and professional advice should be sought.
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