In circumstances where the owners of a business are the shareholders, there is considerable scope for deciding how profits should be taken out of a company.
Firstly, this involves deciding whether to take profit as a salary and/or a dividend.
There are many factors we consider when reviewing whether it is better to take a salary or a dividend:
- Whether the taking of the dividend is a one-off event
- Whether the taking of the dividend is to substitute salary and bonus as income
- Whether a substantial reduction in salary will result and for how long
- The profitability of the company now and in the future (ability to pay dividends)
- Whether the taking of the dividend substitutes for a bonus payment to be more tax efficient and to save NICs
- The corporation tax rates of the company and the tax payable before the dividends are paid – to determine the actual tax efficiency of the payment
- Possible impact on share valuations if dividends are paid regularly
- Impact on pension contributions
- Impact on pension benefits and tax-free lump sums
- Impact on group life/death in services benefits, group critical illness cover, PHI for income replacement and other benefits calculated by reference to salary
- Individual tax rates of the shareholders
- Number of shareholders and whether they all qualify
- Corporate financial planning implications of suggested strategy
- Aligning corporate financial planning with individual personal financial planning needs and requirements
- Risk assessment, compliance and safety aspects
- Balance in remuneration planning is required throughout.
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