Contractor Resources - Salary Vs. Dividends

This is probably one of the most common and most important questions asked by a Contractor working via their owner managed Service Company.

At the outset this may seem like a pretty simple question, however like most tax related questions the answer is as complex as the question is simple due to the many factors that need to be taken into account.

Furthermore, the complexity of the answer is matched only by its importance as the wrong advice could lead to thousands of pounds of extra tax.

The issue of how to distribute monies from your company has taken on even greater importance in recent years due to the increases in Taxation and National Insurance for individuals especially with the introduction of the top rate of tax at 50% on income over £150,000 from 6th April 2010.

To help answer the question posed there has to be an understanding of the major differences between salaries and dividends. Don’t worry, you don’t need to understand the differences – that’s your accountant’s job.

One of the first and possibly the most important thing your accountant should do is help you as a Contractor establish whether you fall ‘inside’ or ‘outside’ of the IR35 legislation. IR35 is an extremely complex subject in itself and so you should choose an experienced specialist contractor accountant to help you determine your status.

Having helped establish your IR35 status the next step should be for your accountant to spend time to get to understand your personal financial requirements. To do this there are some common questions that your accountant would normally ask.

Based on the answers to these and other questions your accountant will be able to carry out strategic ‘bespoke’ tax planning and recommend the most tax efficient way for ‘you’ to take income from your company.

As you can see there is no simple ‘one fits all’ formula. Therefore, to ensure you receive the correct tax saving advice you should choose an experienced specialist contractor accountant who has in depth knowledge of the specific taxation regimes in the industry you work in.

If you have any questions on the above please Contact Us