Dividends or Salary after State Pension Age?

If you’re a more ‘mature’ business owner you might be wondering whether you should pay yourself via dividends or salary after state pension age?

Martin is just such a business owner and will reach state pension age in September. He loves running his company and has no intention of giving up just yet.

Like many other company owners, he’s been paying himself in the form of a low salary and the balance in dividends.

Dividends have the advantage they’re not liable for National Insurance (NI). The disadvantage is they don’t qualify for corporation tax relief.

Martin’s company is making some good profits and he’s in a position to pay himself an extra £10,000 this year.

He knows that from state pension age he won’t have to pay employee NI contributions on any salary he receives. His company must still pay employer’s NI at 13.8% on pay above the threshold (£8,788 for 2020/21).

So, he wonders would it be more tax efficient to pay himself another dividend or take more salary?

Here’s a quick summary of Martin’s current situation:

  • Martin is paying himself a salary of £732 a month (£8,784 a year). This is less than the employee’s NI threshold.
  • He also draws a dividend of £41,216 per annum without having to pay any higher rate tax. (Basic rate band of £50,000 less salary of £8,784).
  • Which means that after tax paid Martin receives £47,337 (equivalent to £3,944.75 pm)
  • The company has a corporation tax saving of £1,669 (£8,784 @ 19%).

For basic rate taxpayers dividends are taxed at 7.5% over the £2,000 dividend allowance. But Martin is already at the basic rate threshold so he’ll pay 32.5% on any more dividends as a higher rate taxpayer. Also, remember dividends don’t qualify for corporation tax relief.

This might suggest extra salary will have the advantage in this case…

Let’s take a look at the numbers:

For a £10,000 dividend and an equivalent amount of salary, which after taking account of corporation tax relief would also cost the company £10,000:

EXTRASALARYvsDIVIDEND 
£10,849£10,000
Taxable£10,849£10,000
Higher rate 40%£4,340
Higher rate 32.5%£3,250
Net Income£6,509£6,750

So it looks like the dividend route still has the advantage.

Note: the exception will be where the employment allowance reduces the employers’ National Insurance on the director’s salary. This will only be where you haven’t used the employment allowance against the NI due on your other employee’s salaries.

More Reading:

Dividends and Pensions

Pension Contributions for Business Owners with Dividends

 

Photo Credit: Ankush Minda

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Risk Warnings

This article and the information on this website is not personal advice. It’s only intended to give you a brief summary or highlight a particular issue for you to investigate further. It is based on our current understanding of legislation and HMRC guidance which can change and is correct as of the date of the post.

If you’re in any doubt whether a particular course of action is suitable for your circumstances, you should seek professional advice. Tax rules can change and any benefits depend on individual circumstances. And, if you are unsure any reliefs are applicable to you, you should consult your accountant or HMRC.

The value of investments and any income from them can fall as well as rise, so you could get back less that you put in. Past performance is not a guide to the future. It cannot provide a guarantee of the future returns of a fund.

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