Advantages of paying yourself with dividends
Saving National Insurance by paying Dividends
To see the advantages of dividends it’s important to understand how different forms of income incur tax:
A Company employee is required to pay income tax and national insurance. For a basic rate tax payer this involves paying 20% income tax + 12% Class 1 National Insurance. Tax of 32% is therefore paid on earnings. Your employer must also pay 13.8% employers national insurance.
A self-employed person must pay income tax on their profits and national insurance, for a basic rate tax payer this is 20% income tax + 9% Class 4 National Insurance + £2.50 a week Class 2 National Insurance. Tax of 29% (plus a bit) is therefore paid on earnings.
A limited company owner paying themselves entirely in dividends pays income tax and corporation tax, for a basic rate tax payer this is 0% income tax (due to the dividend tax credit) and 20% corporation tax on company profits. Tax of 20% is paid on earnings.
As you can see the limited company owner is the clear winner when it comes to protecting earnings from the taxman. The level of saving varies a for higher rate taxpayers but the advantage is still very much with being a dividend receiving limited company owner.
Move on to section 2 of our Dividend Guide to see how you can reduce your tax even more by paying yourself a small salary and the remainder in dividends.