Dear Goldwyns, I run my own limited company and so I draw a monthly salary from it. The problem is this is quite expensive – is there a better option?

Sam Blundell says:

If you own or have shares in a limited company, how do you decide whether to draw a monthly salary or take profits as dividends? For many business owners, old habits stick and the apparent appeal of a regular salary can mean you might not even consider an alternative to the salary option. However, it’s worth weighing up your choices.

If you own or have shares in a limited company, how do you decide whether to draw a monthly salary or take profits as dividends? For many business owners, old habits stick and the apparent appeal of a regular salary can mean you might not even consider an alternative to the salary option. However, it’s worth weighing up your choices.

Secondly, you need to be aware that dividends aren’t necessarily just paid annually - as many people assume - but can be paid on a more regular basis.

Let’s consider the example of John, a Goldwyns client who is a company owner in Southend. He wanted to take a profit of £62,500 as income during the last tax year (6 April 2015 to 5 April 2016). He saved £4,901 in tax by switching from salary to dividends. However this example of course applies to the current financial year and further changes are about to occur.

Now the dividend tax regime has been subjected to significant changes. These include the abolition of tax credits; the introduction of a £5,000 0% band (reducing to £2,000 in April 2018); and an otherwise effective increase in dividend tax rates of 7.5%. These changes mean that the amount John will receive from the same profit this tax year (2016/17) will be £2,526 lower. Although the benefit of changing from salary to dividends has been reduced, John is still financially better off from making the switch.

Ask your accountant if your personal circumstances mean you would benefit from such a change. Ensure you are getting the best possible advice by checking that your accountancy firm is a member of the ICAEW (Institute of Chartered Accountants in England and Wales). The ICAEW business advice service offers any business a free, no obligation consultation.

This article was originally published in the Southend Echo on 2 May 2017.