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# Tony Wickenden: When dividends beat salary for withdrawing business funds

Case studies show dividend route wins for withdrawing business funds

This week I  examine scenarios that put some numbers behind the choice between dividends or salary as the most effective means of withdrawing funds from a business. The underlying narrative to these examples is the dividend route wins. The reduction in corporation tax from 20 per cent to 19 per cent from 2017/18 helps, of course.

Example 1: A one-person company wanting to keep income within basic rate band: no employment allowance available. Table 1.1 shows the dividend route benefits from both the £5,000 dividend allowance and the £3,336 of unused personal allowance (£11,500 – £8,164).

Suffering 19 per cent corporation tax on the dividend is better than salary that suffers no income tax but 25.8 per cent employer/employee National Insurance contributions, of which only the employer’s is tax-relieved. The extra net income comes with a greater slice of the profit. If the gross profit is kept the same for salary and dividend, table 1.2 is more applicable.

Example 2: A one-person and single other employee company wanting to keep income within basic rate band: £3,336 of income covered by employment allowance. The bottom line in table 2.1 is the £400.32 less than in table 1.1, but the gross profit cost is £782.52 lower because an extra £3,336 has been extracted as employee NIC-able salary rather than dividend, thereby avoiding the corporation tax charge on that slice. If we repeat the calculation with the same gross profit as the salary only option, the results are as shown in table 2.2.

Example 3: A one-person company wanting to keep income under £50,000 high income child benefit tax charge level: no employment allowance available. Again, as shown in table 3.1, the dividend route absorbs more (£4,040.01) gross profit, which boosts the resulting net income (by £9,457.82).  If at least the employment allowance, covering £3,336 of earnings, were available, then, as in table 2.1, there would be a cut of £782.52 in the gross profit cost for the salary and dividend option, and a corresponding reduction in net benefit of £400.32 due to employee’s NICs.

Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn

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