Salary or dividend in 2008?

Deciding whether to extract cash from a company as salary or a dividend involves weighing up the tax position of both the company and the shareholder. Extracting cash as a dividend means there is no tax deduction for the company, but the the tax rates on the shareholder are generally lower than salary, with effective rates of 0% or 25%. If cash is extracted as salary it should be tax deductible, but the income tax rates can be higher. From April 2008 there are a number of changes to the income tax and corporation tax rates. In particular there is a change in the rate of income tax on salary to 20%, (from 22%) and the small company rate of corporation tax is being increased to 21% (22% from 2009), with the main corporation tax rate reducing to 28%. Therefore extracting cash as salary will incur income tax at either 20% or 40%, but will reduce the company tax charge by 22% or 28%. By contrast extracting cash as a dividend will reduce be taxed at 0% or 25% but will not save any corporation tax. Ignoring national insurance in many case a salary extraction will lower the overall tax bill. When NIC is brought into the mix a salary payment suffers an additional tax charge (11% for basic rate taxpayers as well as a company NIC charge of 12.8%). This then reduces the attractiveness of salary (ignoring other factors such as the ability to make pension contributions etc). In practically all such cases dividends are now preferred. See: Salary or dividend in 2008?