As the controlling shareholder as well as the main employee of your company, you have a choice on how the income of the company is distributed. It can be paid to the employees as salary/bonus or paid to the shareholders as dividends or, most likely, divided between the two.

Whichever method is used, Income Tax will be payable. In the case of salary/bonus tax is deducted under PAYE when it is paid, for dividends a net amount is paid which is deemed to have paid income tax at the standard rate. When you complete your Self Assessment form at the end of the year, any Higher Rate Tax due will be assessed. The only potential tax advantage is if you can spread the shareholding to pay dividends to someone who has unused standard rate income.

National Insurance Contributions, however, are a different matter. They are only payable on salary/bonus and the rates for 02/03 are 10% for the employee and 11.8% for the employer over the threshold of £4615. This is an extra 21.8% tax, so it is hardly surprising that most people have chosen to take a large part of the profits as dividend. The government is now trying to stop this practice with the IR35 provisions, which say that for carefully selected people, mainly us, all income will be considered to be salary for tax and NIC purposes. Until this is all sorted out, the best advice is talk to your accountant.

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