Extracting profits from a company
National insurance contributions are expensive, but salary can be deducted from taxable profits in the company, so if profits are taxed at the marginal small companies rate (currently 27.5 per cent), there is very little difference between extracting profits by way of salary or dividend for higher rate taxpayers.
Where annual bonuses are payable, the bonus must be due and payable before the company year end, even if the specific amount has not been decided. This is necessary to benefit from tax relief against the profits of the period. The bonus must always be paid within nine months of the year end to secure the tax deduction in the company.
These are subject to a lower rate of income tax than other sources of income, though this is mitigated by the company not being able to claim corporation tax relief. The main advantage of payment by dividend as against salary is that no national insurance is payable on dividends.