1 Paying wages or declaring dividends

We recommend that all of our clients pay themselves a commercial wage from their business, approximating to the national minimum wage of £12,000 per year. This supports the “genuinely in business” argument. Above that level, when you want to take more cash (other than reimbursed expenses) declaring a dividend is often most tax efficient.

2 Dividend vouchers and timing

Dividends are taxable based on the date they are declared, normally the same as the date on which they are paid. But you only have to pay personal tax on dividends if your total income is above a certain amount. Documentation is required to demonstrate that the payments are indeed dividends and not wages made to look like dividends.

The date a dividend payment is declared can bring forward or delay an income tax liability by 12 months!

3 No wages at all, only declare dividends

Some contractors (and some advisers) suggest taking an annual salary of £nil as a director and taking cash from their business entirely by loans. Then declaring dividends late in the day to “repay” the loans. This is aggressive and may increase your profile with HRMC, and it’s more difficult to justify the “genuinely in business” argument commercially. However, the decision to be aggressive or not is more driven by your own attitude to risk than anything else.

4 Leave surplus income in the company

Other tax efficient planning can involve pensions or leaving surplus funds in the business until retirement or a later date when it can be taken within the basic rate of income tax. This will mean your rate of tax could be as low as 20% (the lower corporation tax rate) until you decide to “retire” or are not working. Then it will depend on the rates and reliefs in place at the time.

5 Making the right choice

We act for real people and the companies they control. We help you make the right income choices so that you get the most out of your company in a perfectly legal and very widely used manner.

Our service gives you true peace of mind and our advice is not something that you pay extra for! It’s all part of the standard service at a fixed monthly fee.