Salaries vs Dividends

It is important to bear in mind always that the directors and shareholders of a company are distinct from the company itself. As directors, the individuals are employees and, therefore, amounts drawn as salary must be subjected to income tax under the PAYE scheme and national insurance. As shareholders, income is receivable in the form of dividends.

Salary is deductible in arriving at the company’s profit for corporation tax purposes; dividends are not.

Planning opportunities arise in circumstances where the shareholders and directors are the same people but the directors must always bear in mind their responsibilities to the company, and its shareholders, as a whole.

It is possible to put in place arrangements whereby directors who are also shareholders receive dividends rather than salary, since dividends are not liable to national insurance. However, the saving in national insurance has to be weighed against the additional cost in corporation tax. Care must be exercised as the Inland Revenue are always looking at ways to treat dividends as salary.

As employees, directors are liable to tax on the benefits in kind provided by the company. This includes the provision of company cars and such things as private health care.

There is a general prohibition against loans to directors, though this is not a complete prohibition in the case of private companies, subject to certain rules. However, such loans generate tax liabilities and so advice should be sought if such loans are being considered. Loans to directors must be disclosed in the accounts of the company.

Directors of companies owe a fiduciary duty to those companies. Accordingly, it is now a requirement that any transactions with a director or a member of his family or another business or company controlled by that director must be disclosed in the accounts.