How To Choose - PAYE vs Dividend (UK 2020)
Updated: Oct 16, 2020
Paying yourself is an integral part of any business. Once you have set up a limited company, you have options as to how to pay yourself.
It is worth taking the time to figure out which method is most tax efficient for you and your company.
There are two common options, either pay yourself through PAYE, or via dividend.
The first thing to note: paying yourself through payroll is on the profit and loss account, therefore reducing your net profit and corporate tax liability, whilst dividend is on the balance sheet.
Now, let us take a look at the advantages of each option.
Paying yourself via dividend can be a lower tax option depending on your other sources of income.
• You have a £2,000 annual tax free allowance • It is not compulsory to pay pension • It is not compulsory to pay NI on dividends
You add your other income to your dividend income, and then pay the following rates depending on your tax bracket:
Basic Rate: 7.5%
Higher Rate: 32.5%
Additional Rate: 38.1%
A good test would be to calculate your total income in the year, and check your tax bracket, then compare this with the personal cost of going through PAYE.
PAYE is a pay as your earn scheme.
• You do not need to pay through PAYE if your employees are making less than £472/month.
• You must deduct tax, NI and student loan
• £3,000 employment allowance may be offset against employer class 1 secondary national insurance contributions.
Remember, as the employer you will have to "match" pension and NI, and as the employee you will also be deducting pension and NI.
If you want a professional to look over your books and do the calculation for you, reach out to us! We are more than happy to help.