Depending on the nature of your business, it might be advantageous to structure it as a limited company rather than as a sole trader business. This will allow you to pay yourself with a dividend rather than with a standard salary, which can be a huge boost under the right circumstances since dividends are taxed at a lower rate than regular income. However, paying a dividend doesn't work exactly the same way as a salary, so it's important to make sure that you're not accidentally paying yourself an illegal dividend!
The primary difference between a salary and a dividend is that a salary provides a regular, fixed amount of money each month, while dividend is dependent on your company's profits. Paying out the same dividend every month regardless of the state of your company's finances will get you into some serious trouble with HMRC, so here's a quick primer on how to do things properly.
First of all, determine your company's profits. Hopefully, you have a good accounting system that will easily give you a quick snapshot of the current state of your finances. If not, there's no better time to implement one!
Once you've determined your profits over the course of the year, subtract any dividends already paid this financial year, and then estimate the amount of corporate tax you'll be paying. Again, good accounting software will be able to provide you with an immediate estimate of your rate, but otherwise you can work off an assumption of a standard 20% tax rate. Whatever profit you have left after these calculations is available for paying dividends, also known as 'declaring a dividend'.
Naturally, this can be a bit confusing at first, but always remember that your accountant is there to help you sort through these tricky issues and so that you come out safely on the other side. If you're not sure exactly how to go about applying these guidelines to your own business, be sure to consult with your accountant to ensure that you're not accidentally declaring an illegal dividend!
The primary difference between a salary and a dividend is that a salary provides a regular, fixed amount of money each month, while dividend is dependent on your company's profits. Paying out the same dividend every month regardless of the state of your company's finances will get you into some serious trouble with HMRC, so here's a quick primer on how to do things properly.
First of all, determine your company's profits. Hopefully, you have a good accounting system that will easily give you a quick snapshot of the current state of your finances. If not, there's no better time to implement one!
Once you've determined your profits over the course of the year, subtract any dividends already paid this financial year, and then estimate the amount of corporate tax you'll be paying. Again, good accounting software will be able to provide you with an immediate estimate of your rate, but otherwise you can work off an assumption of a standard 20% tax rate. Whatever profit you have left after these calculations is available for paying dividends, also known as 'declaring a dividend'.
Naturally, this can be a bit confusing at first, but always remember that your accountant is there to help you sort through these tricky issues and so that you come out safely on the other side. If you're not sure exactly how to go about applying these guidelines to your own business, be sure to consult with your accountant to ensure that you're not accidentally declaring an illegal dividend!
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