When Taking A Salary Is Cheaper Than Dividends Overview
When is taking a salary cheaper than dividends for taking money out of a company?
Well, it depends on what you mean by ‘cheaper’. Cheaper how?
If you are only focusing on the HMRC tax consequences then in general declaring a dividend will be cheaper than taking a salary for sums over the level of the personal allowance of £12,570.
However, it is possible for salary to be cheaper as a means for a business owner to draw money out of a Limited company because the tax consequences can be superseded by other considerations.
Employers National Insurance Saving With Dividends
If a company owner is earning more than £9,100 a year running their company, then when they draw money out of it through the payroll in order to fill up their guzzling four-by-four at South Kensington Gulf petrol station (where it has been reported you can pay up to £2.389 a litre), the company will pay Employers National Insurance at the rate of 15.05%.
Insolvent Company
If a company is insolvent then whilst you have to be mindful of Wrongful Trading it can still be permissible to continue trading provided you are transparent with creditors, obtain their approval to vary payment terms or trade on without making the position worse for creditors as a whole.
However, if a company is insolvent it will not usually be able to lawfully declare dividends. Therefore if a dividend is declared it usually will have to be repaid. So to that extent payment of salary is cheaper than dividends.
Preference Transactions Causing Repayment Of Dividends
If a company ends up in Liquidation such as Creditors Voluntary Liquidation or Compulsory Liquidation then you might have to pay back the dividends paid over to you prior to the company being wound up.
Whilst the dividends might have been declared at a time when the company was solvent nevertheless when they were paid it could have been insolvent. As such the payment could risk amounting to a Preference.
Ordinarily, a dividend will be paid and declared around the same time but it does not necessarily follow. Declaration of the dividend creates the obligation to pay it ie. the liability but the payment of it is a separate matter.
It therefore follows that because of the risk of a dividend potentially turning into a Preference in the case of a company that is insolvent which might have to be repaid you could find payment of a salary is overall the cheaper option. There are no hard and fast rules on this but a Director paying themselves a regular salary through a company that is not excessive in all the circumstances, then provided the PAYE and National Insurance have been paid, it is conceivably less likely (but not impossible) for such salary payments to be considered a Preference compared to the payment of dividends.
Oliver Elliot Observation Of When Is Salary Cheaper Than Dividends
It is important to weigh such matters up as well as consider the tax consequences when you are dealing with a company that might be technically solvent but is on the verge of becoming insolvent.
The risk of dividend payments being considered Preferences that might be called upon by a Liquidator to be repaid may increase. Such matters are not necessarily black and white and can lead to disputes which may lead to a Director becoming embroiled in litigation which can be expensive and lead to substantial legal costs. Such costs can potentially make the tax issues appear like a drop in the ocean.
If in any doubt contact us for professional advice to consider your options and you can take an informed decision.
Are you a UK company Director?
If you are a Director of an insolvent company or a bankruptcy, Oliver Elliot can help you. We Know Insolvency Inside Out.
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Disclaimer: When Is Salary Cheaper Than Dividends?
This page When Is Salary Cheaper Than Dividends? is not legal advice and should not be relied upon as such. This article When Is Salary Cheaper Than Dividends? is provided for information purposes only. You can contact us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.:
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