Can I continue paying myself a dividend rather than a salary?
What am I meant to do in the face of conflicting messages from the chancellor? I pay myself a dividend instead of a salary and I hear he plans to take away the tax advantages. What should I plan for next year?
A. Christopher Jenkinsof Wingrave Yeats writes:
You’re right. Gordon Brown is looking at the tax situation of those who pay themselves through dividends, thus avoiding the payment of Employers’ NIC.
Currently if your company pays the lower rate of corporation tax then paying through dividends rather than a salary or bonus is the most tax-efficient way of remuneration for you. You can do this if you don’t go above the £300,000 per year limit for taxable profits. Above that the rule of thumb is to revert to salary. One thing to watch out for is where you end up controlling more than one company, as the limit is divided among all of these ‘associated’ companies.
In the past another route to reducing tax had been to hand over half of your business to your dearly beloved – this is called the ‘shared dividend’ route. But you need to be careful of shifting higher rate taxable income on to your spouse to soak up any unused lower rate income allowances.
The reality is we are all now in tax planning limbo until we know Gordon’s final pronouncement in the April budget. It may be then that you have to rethink your company structure altogether. One option may be to consider a limited partnership (LLP) which doesn’t appear to be under scrutiny. Although it suffers from the arcane structure of a partnership, you can pay yourself without deduction of tax at source and with no Employers’ NIC. The income tax payable can be retained by the LLP as temporary, but useful working capital until due.
By creating different classes of shares with different voting rights, you can turn a limited company into a partner in an LLP so you retain control with a golden vote. Watch out though because transfers that deny or award value in the business to employees and directors as lead to tax traps.