As the number of small and medium sized enterprises (SMEs) continues to swell, it seems fair to suggest that the entrepreneurial spirit is positively flourishing in Britain today. It certainly bodes well for the future: the idea that individual businesses can, between them, generate new wealth and productivity during a slow economic period is a sound principle. But, with so many SMEs coming into existence now, will this entrepreneurial boom really translate into money in our pockets?
The answer could be a resounding “yes”, but only if our ambitious new generation of business leaders attain a sound understanding of the enterprises they run, the way their internal finances operate, and which strategies they can implement on a personal level to maximise their own profitability.
One of the best illustrations of this point is the many ways a new business owner can choose to pay him or herself. It is an area where many people choose to tread carefully, though there is a fine line between care and being overly cautious. Continuum deals with salary, dividends and Her Majesty’s Revenue and Customs (HMRC) tax compliance duties on a daily basis; our clients choose our services for the long-term savings they unlock. By taking on sound advice today, you can put these strategies into practice for years to come, giving you savings that accumulate over time.
So, when you operate your own SME, what are your options?
Paying Yourself a Salary
The most familiar method of earning an income from your own enterprise is, of course, to pay yourself a salary. You can incorporate a Pay As You Earn (PAYE) tax system into your payroll, so that each wage packet you receive is compliant with government tax laws. Your income tax obligations, as well as your national insurance contributions, are automatically covered.
Often, taking a salary is the perfect solution. But if you have not – or have felt unable to – investigate the alternative options available to you as the head of an SME, it is quite likely you have been overpaying your taxes every time you draw your salary. This is where a financial adviser can help.
Paying Yourself a Dividend
As your company grows, it is natural that you may wish to take home a higher income for your hard work, too. But, with higher earnings come higher rates of income tax. It is at this point that you may find value in restructuring your salary, and start claiming a dividend instead.
Your dividend payment is a share of the company profits, and it is taxed at a significantly lower rate to a salary of equivalent value. For instance, the basic income tax rate is 20% on earnings up to £40,000. But once your salary surpasses that figure, your rate of tax increases to 40%. Higher earners who draw more than £150,000 in salary will face a 45% income tax rate.
Meanwhile, dividend payments incur no tax liabilities at the basic rate and are set at 25% above the threshold. Even at the highest rate, the rate is 30.56%.
The even better news is that the company pays no Employers NI on dividends thereby achieving a further saving of 13.8%.
The Advice That Pays Dividends
With corporate taxation being such a widely discussed issue in the news media, it is worth emphasising that there is nothing either illegal or unethical about these arrangements – as long as you take the appropriate steps to comply with tax law. This can mean little more than consulting with accountants and business advisers who will ensure everything is in order. Continuum works closely alongside our clients to make sure your hard work is paying off, and that you are afforded the confidence to realise your business’s fullest potential and the peace of mind that comes from knowing the pitfalls of corporate tax laws have all been addressed.
IMPORTANT: following recent budget changes, the taxation of dividends has been updated.