Using dividends to create a significant cashflow advantage
Significant cashflow benefit can be derived by using dividends to delay payment of shareholder and company tax liabilities.
Taylorcocks recently undertook a review of a company making annual profits of around £100,000 and paying its main director/shareholder a gross salary of around £50,000. Annual tax savings of approximately £10,000 were identified by switching from salary to dividend payments.
Cash flow benefits also arose due to the way in which dividends are treated for tax purposes.
Previously, the company was liable to make a payment of just over £1,650 each month under the PAYE system in respect of the salary paid. By switching to dividends, these monthly payments were reduced to £nil.
As dividends are a distribution of profit, the company’s corporation tax liability was increased by around £9,600. However, this liability did not become payable until 9 months after the company’s relevant year end.
Therefore, not only were overall savings of £10,000 made, but their cashflow improved by £1,650 per month whilst the increase of £9,600 in the company’s corporation tax did not fall due until up to 21 months after the new policy was introduced.
There are of course a number of considerations in devising the most appropriate strategy to extract profit and maximise cashflow benefits. Therefore it is essential that a full review by a professional organisation is undertaken to determine which strategy is best for both company and individual.