Increase Your Net Income

With continuing price and fuel increases we all need to increase our net income, as an owner/director you should be looking at ways to extract profit from your company that increase your net income tax efficiently.

For the moment, consider how much you might save if, as an owner-director, you wanted to extract the £10,000 profit your company makes in 2011/12 by way of a dividend rather than a bonus. Please note that we assume that you are paying higher rate tax, so your earnings exceed the so called ‘upper limit’ for NICs.

There are many matters to be considered when deciding whether directors should be paid by dividend or salary/bonus. In practice, a combination of each is usually an appropriate course.

Remember that dividends are usually payable to all shareholders. If you have outside shareholders who are not involved in the day to day running of the company then you will need to consider your dividend strategy carefully. Although it is possible for shareholders to waive their entitlement to dividends, this can result in tax complications, so a better option may have to be to have different classes of shares, on which different rates of dividend can be paid. However, if this technique is used as part of a scheme to avoid tax or NICs for employees, it may not be effective and thus result in an even higher tax liability.

Finally, you may need to consider the effect that regular payment of dividends will have on the valuation of shares in your company.

As you can see in the following case study, the net amount withdrawn is increased by almost 15 per cent by opting to declare a dividend. But be sure to discuss this with us before you act as this is a very complex area of tax law.

Case Study: 

In this case declaring a dividend increases the net by £741

How can HSJ help?

If you are an owner/manager then why not contact our tax team at for advice on your dividend strategy.

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