We’re all about tax efficiency here at Churchill Knight. Umbrella or limited company options both have advantages; however, the main reason for choosing to work as a contractor through a limited company is that the taxable benefits outweigh the simplicity of working through an umbrella company.
So if you decide the limited company route of contracting is for you, we always suggest paying yourself through dividends (as long as your contract meets the ‘Outside IR35 test’), as it can have a number of advantages and not just the ones you may assume.
Sticking to the rules is always a good thing when it comes to your limited company. HMRC make it clear that in order to benefit from dividends, you shouldn’t pay out more than is available in profits.
Control of Income
By establishing your company’s profits, a director is able to take control of what they wish to hold back, pay as a dividend or simply as a salary. By declaring dividends, creating board minutes, the dividend voucher is completed and a director is controlling the retained profits of the company.
Distributing profits through a limited company is a complex process. Consequently, a shareholder can only draw dividends providing there are sufficient reserves in the company available. If not, the dividend would be illegal.
The tax saving is one of the primary reasons dividends are used so successfully when running a limited company. All UK dividends come with a 10% tax credit. This means the basic rate of tax is given automatically and no further tax is payable on dividends until the higher rate tax bracket is reached.
No National Insurance
Unsurprisingly this is the Number 1 on our list. Paying yourself through dividends is a big deal when it involves National Insurance Contributions (NICs), as they are not payable on company dividends, compared to on salary income, where they are payable.
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