Owner-directors: increasing net income

As an example, consider how much you might save if, as an owner-director, you wanted to extract the £10,000 profit (pre-tax) your company makes in 2010/11 by way of a dividend rather than a bonus.

Case Study 2

As you can see in this case study, the net income is increased by more than 13% by opting to declare a dividend. Be sure to discuss this with us, as this is a complex area of tax law. 

	Bonus £	Dividend £
Profit to extract	10,000	10,000
Employers’ NIC	- 1,135
Gross bonus	8,865
Corporation tax		-2,100
Dividend		7,900
Employees’ NIC	- 89
Income tax @ 40%	- 3,546
Additional tax		- 1,975
Net amount extracted	£5,230	£5,925

Please note that in Case Study 2 we assume that you are paying higher rate tax at 40%, and that your earnings exceed the so-called ‘upper limit’ for NICs. There are many matters to be considered when deciding whether directors should be paid by dividend or salary/bonus. In practice, a combination of each is often an appropriate course.

Remember that dividends are usually payable to all shareholders. Although it is possible to waive dividends, this can result in tax complications, so a better option may be to have different classes of share. Finally, you need to consider with us the effect of regular dividend payments on the valuation of shares in your company.

Remember you can always give us a call!