Salaries or Dividends?

With the economic situation worsening, it might well be tempting for company directors to save on employers’ and employees’ National Insurance Contributions and delay tax payments by switching from paying salaries to paying dividends on shares. If you are thinking of going down this path, do bear in mind the following:

You can only pay dividends out of ‘available profits’: effectively, retained profits. If you pay more in dividends than is lawful, you can create tax problems later on and, if the company becomes insolvent, you may be liable to repay the dividends taken.
If the company should become insolvent, the redundancy payment you receive may well be reduced; salaries count as remuneration, dividends do not. Also, you may compromise your future entitlement to benefits, especially Jobseeker’s Allowance and state pension benefits.
If you reduce your salary too far, you may be in breach of the National Minimum Wage (NMW) Regulations. This could occur if you have a contract with the company. If you do not have a contract, you will normally not qualify for Working Tax Credit. If you have a contract of employment and pay yourself the NMW, you normally will.

posted: 21 Oct 2009