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Paymatters compares wages v dividend

If you are running your own limited company and are given the choice of paying yourself £1 as wages or dividend what are the differences and how do your net earning compare?

Paymatters answer is that the answer depends on whether you will be a zero rate tax payer, low rate tax payer or higher rate tax payer. Also on what other earnings you have.

For example if the £1 sees your employment earnings remaining under the employee and employer national insurance limit and your company pays corporation tax at 20% you can actually pay yourself a gross and net wage of £1.25.

If however your wages are between the employee and employer exempt limits (which has extra meaning when business receive an additional employers NIC limit of £2,000 in 2014/2015) you can again pay yourself a £1.25 gross dividend but this creates a net wage of £1.10 and is hence marginally better than taking a £1 dividend. The question is if the extra net income over the year of approx. £200 is worth the admin of making returns that aren’t null and hence having to administer HMRC payments etc.
If you are over the employee and employer exempt limits but still under your personal allowance you can pay a £1.10 gross wage which nets only 97pence (less than a £1 dividend).

It is also worth noting that when you pay a wage greater than the gross dividend then you use slightly more of your personal allowance and this can result in more of your dividend income being subject to high rate tax.

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