Should you take a salary or dividends in 2019/20?

It can be challenging as a business owner, to know where the tipping point of remuneration is. Should you take a salary or dividends in 2019/20, or a combination of the two? You deserve to be rewarded for your hard work and yet leaving your e-commerce business with insufficient funds can be detrimental to its growth. Let’s look at the options and see how to balance your financial needs and wants with those of your business for this tax year.

While allowance figures might change year on year, the basic approach remains relatively unchanged. Whether you take a salary or dividends or both in 2019/20 may be entirely dependent on the stage your e-commerce business is at. All options have advantages and disadvantages so let’s break it down.

Taking a salary

A salary has many advantages. First and foremost, it is an effective tax strategy and it will have benefits in terms of contributions to your pension and contributory benefits.

Your business may have an available employment allowance, which in 2019/20 mean your business can claim up to £3,000 a year off your National Insurance bill. However, if you are the sole employee then this is not available.

Additionally, a salary gives you a regular income, which dependent on your budget, maybe a crucial point that simply cannot be overlooked.

Without Employment Allowance

If your e-commerce business is still relatively new, it is likely that you won’t qualify for the employment allowance. In this case, the optimal salary point is the maximum yield within the primary threshold. For 2019/20 this is a net figure of £8,632, giving you a monthly salary of £719. This will avoid any employee’s or employer’s National Insurance and tax. Despite no NIC or taxes being due, this still counts as a year of contributions for your record. Additionally, the salary will be an allowable expense against your business’ corporation tax liability.

Unlike dividends, salaries can be paid regardless of your business’ profit or loss, making it a frontrunner for your first-year trading.

With Employment Allowance

If your business does qualify for the employment allowance then a higher salary, at the rate of your personal allowance is the prudent call (£12,500). The employment allowance will almost entirely cover the employer’s NIC. The corporation tax reduction on the additional salary means your business will make a net saving.

Taking a salary or dividends is a tough decision
Niklas Kickl

Choosing dividends

Before you decide on a salary or dividends, let’s look at the latter. If your business is well-established or growing quickly, you can use your retained profits (already taxed) to pay out dividends. Dividends aren’t tax-deductible.

Dividends also have a tax allowance. For 2019/20, it is £2,000. This is for everyone, regardless of their personal tax rate. Once you reach this threshold further dividends are taxed at a more favourable rate than salaries.

Of course, planning for dividends involves financial forecasting. By knowing where your year-end is likely to emerge you should know roughly the level of dividends you can expect to be available

A fusion of salary and dividends

By using the information above, you may now be aware that it should rarely be a case of salary or dividends, but a tax-efficient mix of the two.

You can make the most of your personal tax allowance, and any employment allowance your business qualifies for, then switch to the lower tax option of dividends. By following this advice, you can maximise your take-home funds whilst minimising the tax bills for all parties.

That sweet spot – salary or dividends in 2019/20 for you?

While it is important that you receive enough remuneration, it is also vital that you do not extract too many funds from your business too soon. E-commerce businesses, in particular, tend to house a lot of inventory so restricting your business’ cash flow may lead to fewer opportunities for growth, or unnecessary borrowing.

At Unicorn Accounting, we are experts in the e-commerce business, so whether it’s selecting to take salary or dividends in 2019/20 to how to handle tax-rates, we can advise. We will get to know your business and help it to grow to its full potential. If you would like to discuss the right salary and dividend split for you, get in touch.

The best time to start is now.