You can pay dividends instead of salaries. Paying dividends can offer tax advantages, as dividends are not subject to employers' and employees' National Insurance.
However, HM Revenue & Customs (HMRC) keeps a close eye on companies that sell the services of the shareholders (or partners). Special rules apply if, had you worked for a client personally, rather than through your company, you would have been considered an employee of the client you did the work for. If that is the case, you can be treated as a 'Personal Service Company' and these rules can mean that you are required to pay tax and National Insurance contributions on a 'deemed' payment as if you had been paid a larger salary rather than dividends.
In addition, if income is being split between more than one shareholder in order for a lower-earning shareholder to make use of their personal allowances, so that that shareholder is receiving more than the market rate reward for their contribution to the business, new 'income-shifting' legislation pending for income assessable in the tax year 2008/9 may mean that the higher-earning shareholder is taxed as if the split had not taken place (see question 14). The same legislation will apply if income from a partnership is split between partners to the same end.
These new rules mean it is vital to take advice on the most tax-efficient way to take an income from your business.
