Guide to Freelancing - PCG

5. Pay all three taxes (PAYE, Employee‟s NICs and Employer‟s NICs) to HMRC from the business
bank account – this is usually done monthly by direct debit. Your accountant can advise on the
due dates. These payments must be made electronically and the cleared funds need to be in
HMRC‟s bank account by the 19 th day of the month after the salary was paid.
Paying yourself a dividend
Dividends can be paid to the owners (shareholders) of a company from the retained (post tax)
profit provided that the correct procedures are followed. This involves the Board of Directors
having a meeting, formally voting the dividend and providing a written record of that decision.
There must also be documentation in the form of a dividend voucher which is then issued to the
shareholder(s). Dividend paperwork must conform to the law – PCG members can download a
dividend voucher from the tax advice section of www.pcg.org.uk/resources.
The advantage of paying yourself dividends is that neither employee nor employer NICs are
payable. However, the total paid out in dividends cannot exceed the retained profits of the
company. Your accountant can assist you with calculating funds available for distribution and
preparation of the appropriate paperwork.
Dividends can be declared as often as you like, although if you are paying yourself regular
dividends of the same amount (e.g. £1,000 once a month) there is a risk that the taxman could
reclassify the payments as salary, which would negate any benefit from receiving dividends upon
which neither employee nor employer NICs are payable.
The payment of a dividend should be completely separate from other payments; i.e. do not fall
into the trap of transferring one monthly amount from your business to your personal bank
account which is a composite figure of salary, expenses and dividend. If HMRC see such a
payment, they may try to argue that it is all salary!
Calculating dividends
The value of the gross dividend which can be distributed depends upon the realisable profit of the
company. In any one year, the realisable profit equates to the Company income less Expenses +
Corporation Tax. Bear in mind that some of the realisable funds may need to be invested in the
business. See also the section regarding tax on dividends.
Deciding whether to pay salary or dividend
As a company director you can decide how and when you are paid. There are various strategies for
doing this based on the relative tax implications. If you haven‟t drawn up a contract of
employment between you and your company (and you‟re not obliged to), then you are not subject
to the National Minimum Wage rules, which means you can set a salary of your choice.
Some freelancers opt for a policy of taking a low salary and topping it up with dividends. The
salary will be between £5,304 and £7,072 as any salary between these two points ensures a credit
for NIC purposes which helps in terms of future state pension and other benefits, whilst remaining
below the point where the salary is taxed. This takes advantage of the lower rate of tax for
dividends. Not everybody operates this way – your accountant can advise on the best route for
you.
Another factor to consider is corporation tax. Any salary you pay yourself is an allowable expense,
which reduces the company profit and consequently the corporation tax due. Dividends can‟t be
claimed as an expense, so they don‟t reduce corporation tax.
How you pay yourself should also take into account a number of factors including your pension
provision and the amount of money you wish to retain in your business for future investment.
Copyright PCG September 2011 Guide to Freelancing Version 7.0 39