As an employee working in a company, it’s sometimes easy to take for granted that your pay will just be deposited into your bank account at the end of every month – hopefully!
However, whenever you’re the owner of your company, the process of getting paid is a little bit different. As a director and shareholder in your business, you can essentially be paid in three different ways; salary, dividends or pension contributions, which all have their own advantages and disadvantages.
This Global Entrepreneurship Week (14-20 Nov), we are taking a look at the upsides and downsides of all three methods of payment to help you choose what’s best for you.
Taking a Salary
If you decide to take a salary, this means you will be put on the company’s payroll which comes with numerous benefits including:
- You can build up qualifying years that will go towards your state pension
- You can make higher pension contributions
- You can retain maternity benefits
- Applying for mortgages and insurance policies can be easier
- It can reduce the amount of corporation tax your company needs to pay
- You can take a salary even if your business doesn’t make a profit
Having said all that, there are a few downsides to being paid a salary. These include:
- Both you and your company will be required to pay National Insurance (NI) contributions
- Being paid a salary can also mean higher rates of income tax
Being Paid Dividends
Put simply, taking dividends means getting paid a share of the company’s profits. Of course, if the company hasn’t made any profits, then dividends cannot be paid.
Including significantly reducing your tax bill, being paid dividends comes with some advantages.
- It attracts lower rates of income tax than a salary
- No National Insurance contributions are payable with dividends
The drawbacks to dividends include:
- Becoming reliant on dividends can make your income unpredictable
- Dividends are paid after corporation tax has been deducted
- If you take a dividend that is not covered by company profits, you have effectively taken a loan from the company which will need to be repaid. There also could be a tax charge.
- For the purposes of tax relief on pension contributions, dividends don’t count as relevant UK earnings
Some business owners may opt for remuneration in the form of pension contributions however, it comes with one major drawback – this cannot be accessed until at least the age of 55. With this in mind, pension contributions should not be seen as a substitute for a salary or being paid in dividends, but they can serve as an addition.
The main benefits of pension contributions include:
- They don’t add to your income and therefore won’t increase your tax
- Pension contributions are a business expense
- There are no National Insurance contributions to pay
- They are not limited by the size of your salary – however, you are not allowed to pay more into a pension than your salary for that year or £40,000 (whichever is lower).
As a company owner, choosing how you will be paid can seem like a bit of a minefield but luckily, our expert team of staff is on hand to guide you and answer any queries you may have.