As the director in a limited company, dividend payments are the usual way for you to take money out of the company – and see a financial return on your investment into the company.
Dividends are payments made to the company’s shareholders when the business has made a profit. What’s not re-invested into the company can be paid out as dividend payments to your shareholders, of which you’re one. But what’s the most effective way to do this?
Dividends as a part of good wealth management
As a company director, the company’s finances aren’t your only concern – you also have to make sure you’re managing your own personal finances in the best way possible.
Good wealth management is essential as a director, and that means taking an informed, long-term look at the ways in which you’re paid, the financial vehicles you’re using and the tax planning you’re carrying out across the year.
To make your personal finances work effectively:
- Split your finances into business and personal wealth – it’s vital to create a clear divide between business cash (money in your limited company’s bank account) and your own personal cash (money in your personal current account and investments). Any profit you create is not ‘your money’ until it’s paid to you by the business.
- Ensure you’re being tax efficient – Once a dividend is paid to you – and that money is now yours – you’ll be liable to pay income tax on that income. The rates of income tax in most territories will be higher than the rate of corporation tax. So it’s usually a good idea to keep your profits in the business for as long as possible, minimising the amount of income you’ll have to pay when you file your annual personal tax return.
- Pay your dividends at the right time – the timing of WHEN you pay a dividend is important. If you pay a large dividend at the end of the tax year, it may take you over your tax allowance for the year. And if your total dividend income is too big, you could end up paying more higher-rate tax than you need to.
- Look at other ways to be paid – dividends are not your only option when it comes to getting paid as a director. You could put yourself on the payroll and take a small ‘living wage’. Or you could have your profits paid out as pension contributions into a personal pension scheme. So it’s sensible to consider all the tax-efficient alternatives.
Planning your directors’ pay
If you want to get the most from directors’ pay, get in touch with us. As your trusted wealth adviser, we’ll work with you to maximise your earnings. This includes helping you forecast your earnings and profits, planning out your dividend payments from the company and setting up your finances so you’re being as tax efficient as possible.
This information does not constitute financial or legal advice and is for general information purposes only. Please contact DLA Partners for specific advice relating to your particular circumstances.