Salary vs Dividends: For decades, small business owners have been guided by the conventional wisdom: take a small salary and the rest as dividends to minimise tax. As an accountant advising construction businesses across the UK, I’ve given that advice myself many times. But recently, I’ve started looking at things differently.
Could a £100k salary actually be better than dividends? Surprisingly, yes – especially when you consider psychology, budgeting, and overall financial clarity.
Why Salary Might Outperform Dividends
Here are the key reasons why a higher salary can make more sense:
1. Eliminate Surprise Tax Bills
When you pay taxes monthly through PAYE, you avoid the shock of large, unexpected tax payments. Dividends can create substantial tax liabilities, often payable in lump sums, causing cash flow challenges.
2. Easier Monthly Budgeting
With a regular salary, household budgeting becomes straightforward. Your income is predictable, helping you manage personal and business finances more effectively.
3. Avoid the Temptation of Overspending
Dividends can encourage overspending. It’s easy to justify taking extra money for holidays, new vehicles, or personal expenses. The issue arises when the tax bill becomes due, and those funds are already spent.
4. Improved Financial Mindset
Knowing exactly how much you’ll earn each month creates financial clarity. It can reduce stress and provide a stable financial outlook, positively impacting your mindset and decision-making.
Are Dividends Still Worth Considering?
Absolutely. Dividends still offer tax benefits, particularly around the £100k mark. However, it’s essential to weigh these benefits against potential psychological and cash-flow advantages of a consistent salary.
Additionally, if your business isn’t currently using its full employment allowance, the advantages of a higher salary could increase even further.
Making the Right Decision for Your Business
Choosing between salary vs dividends isn’t just a tax decision; it’s also about cash flow management, financial stability, and psychological well-being. What works best for your business will depend on your personal circumstances, business goals, and financial discipline.
As always, seeking tailored advice from an accountant who understands your industry and personal situation is crucial.
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