Salary v Dividend - The Book-keepers Forum (UK)

NA_AA · Guru

Salary v Dividend

Truemanbrown · Senior Member

Salary:

Advantages - reduces Corporation Tax Bill;
- can be paid even when the company is making a loss
- could enhance pension contribution allowances

Disadvantages - liable for national insurance contributions
- only available to employees

Dividend:

Advantages - No national insurance liability
- Non-working shareholders are entitled to dividends

Disadvantages - can normally only be paid when the company is making a profit

In reality, the small owner-manager company would give a mixture of salary and dividends to a director/shareholder.

Shamus · Forum Moderator & Expert

If you pay dividends it's not salary so you pay no Empoyee or (more importantly) Employer national insurance contributions.

The NI is the real reason that the lat Government brought in the IR35 legislation.

Here's a link to this discussion that's come up before on the site :

http://www.book-keepers.org.uk/t45819284/directors-dividend-only-no-salary/

And here's an interesting discussion on the subject on Aweb

http://www.accountingweb.co.uk/anyanswers/dividends-rather-salary

As for all of one, non of the other, remember that salary is an expense where dividends are not (They are a distribution of profits).

Also worth mentioning is that if you don't pay any N.I. then you are not contributing anything towards your state pension which will be reduced / eradicated by the shortfall in contributions.

Most directors who do not fall foul of IR35 legislaion actually pay a combination of salary and dividends

Shamus · Forum Moderator & Expert

snap biggrin

NA_AA · Guru

Thanks guys - very helpful

The reason why I asked this question was becasue I have come across a client who was initally paying themselves a salary (monthly) and a small dividend (ad-hoc basis) - which is what you would expect from a reasonably small company.

However, they have all of a sudden decided that they no longer want to pay themselves a salary - they only want to pay the 'salary' in the form of a dividend on a monthly basis - which to me seems a little strange..... unless I am reading too much into this....?

NA_AA · Guru

What would happen in the case where the above situation was taking place in a company where there were several partners?

Are there any legal implications regarding this matter?

Are there any implications regarding employment law? e.g. if no longer paid a salary... is there no longer an employment contract.... therefore no longer an employee....?

Truemanbrown · Senior Member

Normally, what the director would normally do is take a salary that makes full use of their personal allowance and then the director should draw the remainder out in dividends.

Because they are directors of the company, they are classed as office holders and, therefore, they can do work and be for it in that capacity. This is normally unless there is a contract in place which make them workers.

That is why the national minimum wage regulations normally do not apply to directors.