Boost your income smartly: Save 7% with Dividends!

Are you worried about becoming a contractor because you will be a high-earning individual with an income surpassing £50,000? If so, you might be wondering about the most tax-efficient way to pay yourself. One strategy gaining popularity among entrepreneurs and business owners is paying themselves through dividends instead of a traditional salary. By doing so, you could potentially save 7% in taxes, making it a financially better choice.

When your annual income goes beyond the £50,000 threshold, the income tax rates can become less favorable, often reaching nearlyup to 40%. However, there’s an attractive option that could help you retain a larger portion of your earnings – dividends.

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Dividends are a form of profit distribution to shareholders of a company. As a business owner, you can pay yourself dividends based on your shareholding in the company, providing a more tax-efficient way to access your profits.

  1. Basic Rate Taxpayers (£12,571 – £50,270) : Dividends are taxed at 8.75%
  2. Higher Rate Taxpayers (£50,271 – £125,140) : Dividends are taxed at 33.75%
  3. Additional Rate Taxpayers (£125,140 upwards) : Dividends are taxed at 39.35%

If you choose to pay yourself a salary, the income tax rates can be significantly higher, with the top tax bracket reaching almost 40%.

Option 1: Salary

With a traditional salary, you would be subject to income tax at 40% on the amount exceeding £50,000. So, £60,000 – £50,000 = £10,000 taxable at 40%.

Tax = £10,000 x 40% = £4,000

Option 2: Dividends

If you opt to pay yourself in dividends instead, you would first utilize the £1,000 tax-free dividend allowance (applicable to all taxpayers). This is set to be halved again at the start of the 2024/25 tax year. Standing at £500

Then, the remaining £9,000 would be taxed at the appropriate dividend rate, which, in this case, is 33.75% for higher-rate taxpayers.

Tax = £9,000 x 33.75% = £3,037

Comparing the two scenarios, paying yourself in dividends would save you £963 (£4,000 – £3037) in taxes, which translates to a 7% tax advantage.

While dividends may seem like a straightforward and tax-efficient approach, it’s essential to consider your individual circumstances and consult with a qualified accountant or tax advisor. Tax rules and regulations can change, and your specific financial situation might warrant different strategies

We cover dividends in our course in more detail, but, if you have any questions now, I am here to support you. In the meantime, check out the website to discover what else we offer within our course!

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