If you run your own company, you might have the option to take a bonus either as salary or as a dividend. But which one leaves you better off?
The answer depends on several factors: how much profit your company has, your existing income, the current rates of tax and National Insurance, and whether you’re taking advantage of available allowances.
Salary: Pros and Cons
Taking a bonus as salary means it's taxed through PAYE, with income tax and National Insurance deducted at source. It can boost your pension contributions and improve borrowing power (e.g. for mortgages), but it may also push you into a higher tax band.
Dividend: Pros and Cons
Dividends aren’t subject to National Insurance and are often a more tax-efficient way of taking money out of a company. However, they can only be paid from company profits after corporation tax. Also, the tax-free dividend allowance has now been reduced to £500, so more of the dividend is now taxable than in the past.
So, which is better?
It depends. Sometimes it makes sense to mix both to strike the right balance between tax efficiency and personal financial goals.
We use tailored calculations and up-to-date tools to help clients compare the actual take-home pay of different options. What works best for one director-shareholder might not be right for another.
If you’re thinking about taking a bonus, we can help you work out the most tax-efficient way to do it, based on your company’s situation and your personal plans.
Get in touch if you'd like us to run the numbers for you.