Apply Dividend Rather Than Bonuses To Save Personal Tax

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Information about Apply Dividend Rather Than Bonuses To Save Personal Tax
Finance

Published on February 27, 2014

Author: clothdoug7

Source: slideshare.net

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For many small business, it is pretty much a common technique to utilize dividend payments instead of higher bonuses as a way to save tax bill for the managing shareholder. All the savings in connection with this come from the fact that National Insurance is normally due on earned income whereas there is no NI on dividends. In situations where the owner of a business is also employed in the business they have the option to extract their remuneration either in the shape of dividends in their capacity as stakeholders or wages as they are working for the company or a mixture of both.

use dividend in placed of For the majority of business enterprise, it's pretty much a standard approach to use dividend rather than high bonuses as a way to help save taxes for the managing shareholder. The savings in connection with this come via the fact that National Insurance is payable on earnings whereas there is no NI on dividends. In situations where the shareholder of a Ltd Company is also employed in the business they have the option to draw out their remuneration either in the shape of dividend payment in their position as stakeholders or salary because they are working for the company or a combination of both. The majority of accounting firms, such as Alexander Ene mostly use this tactic in situations that lower rate of business tax applies. Without earned income, there are going to be no NI payable. And so the real question is why then pay a wage at all? Why not simply pay it all out as dividend and avoid all the National Insurance trap completely? Well the answer happens to be in what we get as a result of paying National Insurance. Much of our N.I. Contribution has a bearing on much of our entitlement to state benefits for instance state pensions, statutory sick pay, maternity pay, statutory paternity pay, etc. One thing with National Insurance Contribution and the many benefits we derive out of it is that the sums are not directly proportional. However the contributions will be directly proportional to chargeable earnings. It follows from above that after a specified amount of National Insurance , no further benefits will accrue by further payment. Often the optimum amount of earnings required to attain this utmost benefit level is dependent upon individual situations. Business owners, much like any one else require earnings on a repeated basis. Having worked out exactly what yearly salary you will need, you need to make up the remainder using dividend. When it comes to establishing the regular dividend level, it is crucial to make sure that you don't exceed the legal limit. The appropriate limit here simply refers to the amount that helps to ensure that dividends are generally only paid out of distributable reserves. The distributable reserves of a company will be the built up income less it's accrued deficits. The principal hazard of exceeding the distributable reserves is the fact that HMRC could argue that the surplus are cheap loans to owners and this could complicate things. Thus, though dividend is the far more tax efficient strategy to extract income from your company, it's important that the company owners ensure that the dividend levels don't exceed the businesses accummulated profits. This is an illustration of a pretty simple tax planning method that could legitimately save a business tax. However it must be borne in mind that this specific tax planning strategy is solely applicable for incorporated businesses. Furthermore, it is a very good reason why anybody who is operating a small business in the form of sole trader or unincorporated partnership should look into switching their business legal entity to a Ltd Company. More so if that business venture is making a decent profit margin. This is certainly something which any general practice accountant

should be able to assist with. Ensure to seek advice from skilled accountants in Finchley before applying any of the concepts in this article as they really are very dependent on individual circumstances.

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