Are directors better with a wage or dividends?

by **weegirl** on Sat Apr 25, 2009 6:11 pm

My friends have just started a limited company, and I am helping with their payroll. I have read that it may be more beneficial for them to be paid a mixture of both a wage and dividends as they could save money on NIC contributions. Could someone please help me on this?

The company is in the early stages, and they are not expecting much of a profit this trading year. They don't have any other employment either.

Thanks

by **weegirl** on Sat Apr 25, 2009 6:14 pm

Forgot to say, am I right in reading into it that this would not be beneficial for a director unless they were in the higher tax bracket?

by **jamiel** on Mon Apr 27, 2009 8:58 pm

There are gains to be made, but you need to do a bit of maths to be sure, and you will still need to pay a wage. Pick any wage above minimum wage for the directors, calculate their total NIC and PAYE for the year on that wage and the see how much money they still have in the bank as profit for the tax year. Then minus the 20% Corporation tax the company will have to pay on profits at the end of the year, and however much is left is what can be paid out in dividends. If that total is more than what they would have made by paying a high wage and NIC and PAYE each month (very likely) , then if they don't mind the minimum wage that is the way to go.

The important thing to note here is that dividends can only be paid out of profits, and profits are subject to Corporation Tax so keep 20% aside every time!

by **weegirl** on Sun May 10, 2009 12:59 pm

Thanks for that, it's going to be tricky as we have no idea how the product will be received and what they will sell as yet, but I'll keep a close eye on it.

by **Lambs** on Sun May 10, 2009 2:19 pm

Hi,

My understanding is that directors who DO NOT have a contract of employment, are not bound by the National Minimum Wage. As a rule, it is advisable for a director to be paid salary of at least the Lower Earnings Limit, as this wil entitle him or her to the annual NI 'credit' for state benefits including pension, even if it doesn't exceed the Primary Earnings Threshold. (i.e., it can obtain the 'credit' without actually having to pay any NIC).

Salary is of course deductible for the company whilst dividends are not; assuming the directors have no other significant source of income then payments in between the LEL and the PET are unlikely to cost much (if any) tax personally.

It is common for directors to take this level of salary and to take further income in their capacity as shareholdes - i.e., as dividends.

The previous advice as regards ensuring that there are sufficient profits to pay out the dividends, and covering the CT charge, is worth repeating.

Kind regards,

Lambs