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Apply Distributions As Well As Bonuses To Save Personal Tax

By Expert Author: Walter Ridpath

For the majority of organization, it is pretty much a common approach to utilize dividend payments rather than high salaries in order to help save tax for the working shareholder. The savings in this regard come from the fact that National Insurance is due on earned income while you don't have NI on dividends. In instances where the proprietor of a Ltd Company also happens to be employed in the business they have the choice to take out their remuneration either in the form of dividends through their position as investors or wages because they are employed by the business or a combination of both. The vast majority of accountants, such as alexanderene.com mostly employ this approach in instances where small companies rate of corporation tax applies.

Without earned income, there are going to be no National Insurance to pay. Consequently the real question is why then pay a salary in any respect? Why not just pay it all out as dividend and avoid the National Insurance trap altogether? Basically the answer is in what we receive by paying National Insurance. Our National Insurance Contribution affects much of our entitlement to state benefits including retirement pensions, statutory sick pay, maternity pay, statutory paternity pay, etc.

The thing with NI Contribution and the many benefits people get out of them would be that the amounts won't be directly proportional. On the other hand the contributions will be directly proportional with the taxable earnings.

Thus, after a particular level of National Insurance , virtually no further added benefit could accrue out of further payment. Often the optimum level of salary needed to attain that utmost benefit level depends on individual situations.

Company owners, much like every one else require earnings on a regular basis. Having figured out what yearly salary you need, you need to make up the rest through dividend. When setting the monthly dividend rate, it is important to make certain that you do not go over the legal limit.

The authorized limit here basically refers to the sum that makes certain that dividends are generally only paid out out of distributable profits. The distributable reserves of a corporation will be the accrued income less it's accumulated deficits. The main hazard of exceeding the distributable reserves is the fact that HM Revenue & Customs can argue that the excess are actually loans to directors which could complicate matters. Thus, whilst dividend may be the far more tax efficient way to draw out profits from your business enterprise, it is vital that the company owners make sure that the dividend levels do not go over the company's accummulated profits.

The above illustrates a pretty simple tax planning tactic that could legally save a company tax. However it should be borne in mind that this tax planning technique is only applicable to incorporated businesses. It is also a good reason why anyone who is running a business enterprise as a sole trader or unincorporated partnership should consider transforming their business entity to a Limited Company. This is even more relevant if that business enterprise is generating a sizable profit. This is something which any general practice accountancy firm should be able to assist with. Make sure to consult professional accountants in Finchley before implementing any of the strategies on this article since they are very dependent on individual situations.

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