Charging the right salary is important to maximise your dividend in a limited company. But how much salary should you take? How much is right? And should you use the simplification rule or the main rule? Well, the 3:12 rules are a matter of dispute among scholars. But it doesn't have to be that complicated. Here, we walk you through the dividend rules for sole proprietorships so you can share in your company's profits in the most efficient way.
The profit that a company makes can be taken out mainly in the form of wages or dividends. As the owner of a few-member company, gravitating towards dividends can be tempting, as it is advantageous from a tax point of view to choose dividends over salaries. This is because capital income from qualifying shares is only taxed at 20% up to a certain limit (more on this later).
If you choose to take your profits as a salary, a lot will be lost in tax and employer's contributions, especially if you go above the 20% threshold for state income tax. In 2022, the threshold for state income tax for those under 65 is set at SEK 554 900.
As the owner of a limited company, dividends are therefore the most effective way to share in your company's profits. At the same time, it's rarely a good idea to take a pay cut altogether. There are two main reasons for this:
1. Salary entitles you to good and important benefits
2. Wage withdrawals may give rise to greater dividend room.
If you take a salary, you are entitled to benefits such as a state pension, sickness benefit and parental benefit. The same does not apply to income from capital. Consequently, taking a salary can be a good idea, as it creates social security, both today and tomorrow.
Ceilings for these benefits in 2022:
- Pensionable income (PGI) SEK 572 970
- Sickness benefit income (SGI) SEK 483 000
- Parental benefit (based on SGI) SEK 483 000
To maximise your PGI, SGI and parental benefit, you should therefore draw an annual salary of SEK 572 970. Although this is just above the threshold for paying state income tax, at this annual salary you maximise your general pension savings, while at the same time you are entitled to the highest possible compensation from Försäkringskassan in the event that you become ill or have to take parental leave.
In addition to entitling you to benefits, salary withdrawals can give rise to greater dividend room. In simpler terms, this means that a higher salary can create the conditions for larger dividends, especially if the company has high salary costs, as the limit amount is often larger.
The question was: salary or dividend? And the answer is almost always that a combination of both is the best option. Exactly how much salary and how much dividend you should take is of course more situational. After all, it depends very much on the situation you and your business are in. Is the company making a profit? Should the profit be reinvested? Do you want to maximise your benefits?
However, how much dividend you can take (at 20% tax) and salary you should thus take is a completely different question, much easier to answer. That answer can always be found in the 3:12 rules, and more specifically in the limit amount calculated using the same. So let's take a closer look at it.
At the most basic level, the threshold amount represents the 20% of the dividend that may be taxed. The threshold amount is thus a value that determines the amount of the portion of the dividend that is subject to lower taxation.
The threshold amount can be calculated in two different ways, by the simplification rule or by the main rule. It is free to apply the rule that gives the highest limit amount. However, you may only use the simplification rule in one of your companies, in case you own more.
The simplification rule is often, but not always, most advantageous to apply in small companies with few employees. Under the simplification rule, the threshold amount is determined by a lump sum:
- Limit amount under the simplification rule in 2022: SEK 187 550
- Limit amount under the simplification rule 2023: SEK 195 250
This means that in 2022 your company can distribute low-taxed dividends up to SEK 187 550, and in 2023 up to SEK 195 250. If the full limit amount is distributed, you as the sole owner will receive after tax of 20% in 2022 SEK 150 040 in your wallet, and in 2023 SEK 156 200.
Since dividends are always paid on taxed money, i.e. on the company's profit after corporation tax, it will, somewhat simplified, require a profit in 2022 of SEK 246 000 to withdraw the full limit amount in 2023.
The second option to calculate the limit amount is by applying the main rule. The threshold amount is then determined by the payroll, which is 50% of the company's payroll, i.e. half of the total cash salary payments from the previous financial year.
This means that the main rule may allow for significantly higher thresholds than the simplification rule in cases where the wage band is large. In a simplified way, one can think that large payrolls equals large payrolls, which equals large dividends. It is important to remember that cash wages apply, i.e. government subsidies and benefits cannot be taken into account.
However, in order to be able to apply the main rule, you need to meet the so-called salary withdrawal requirement, which you do by withdrawing sufficient salary from the company, either by yourself or by someone close to you.
In 2022 and 2023 respectively, the payroll requirement for dividends under the main rule is:
- SEK 409,200 (6 IBB) + 5% of the company's cash salary base (2021) or SEK 654,720 (9.6 IBB)
- SEK 426,000 (6 IBB) + 5% of the company's cash salary base (2022) or SEK 681,600 (9.6 IBB)
If you meet the requirement, the limit is therefore calculated up to 50% of the total wage base. In other words, the amount of your low-taxed dividend is equal to 50% of your company's total payroll.
As we saw, there were two ways to determine the take-home pay requirement, which then becomes the basis for determining the threshold amount under the main rule. There was a lower limit (6 IBB + 5% of the company's cash wage base) and a higher limit of 9.6 income base amounts.
The higher limit is most advantageous to apply when the total wage base is higher than SEK 5 112 000. If the wage base in 2022 is higher than this, it is therefore sufficient to draw an annual salary of 9.6 IBB, i.e. 681 600 SEK.
Consequently, the option of 6 IBB + 5 % of the company's cash wage base is more appropriate if the wage base is less than EUR 5 112 000.
It may also be worth noting that there is an upper limit on how large the wage range can be. According to the rules, the salary range or limit may not exceed an amount equal to 50 times the remuneration received from the company by the employee or his/her close relatives. This ceiling is therefore governed by the ratio between the salary you or a close relative has received and the total salary base. For example, if in 2022 you receive an annual salary of SEK 681 600, your salary range can at most correspond to a limit amount of SEK 34 080 000 under the main rule in the tax year 2023.
One way to increase the company's cash wage base and thereby benefit from the main rule in the form of a higher threshold amount is through so-called reverse wage shifting. This means that you exchange a benefit for cash wages.
In practice, reverse wage exchanges are usually implemented by paying for the benefit with taxed money. Thus, you choose to take a higher net salary and pay for your benefit on your own. In doing so, you avoid the employer tax associated with the benefit in question while increasing the company's total payroll. In this way, you can reach higher salary levels and meet the payroll deduction requirement of the main rule.
Of course, just because you can make a distribution doesn't mean you have to. And if you choose not to make a dividend, the limit amount will be added to your so-called saved dividend room and calculated against the government lending rate plus three percentage points (3.22% in 2022).
The same applies if you choose to share only a certain part of your limit. In that case, the difference will be added to your saved distribution room and calculated at the same interest rate.
This means that there is a certain snowball effect where your saved dividend room grows bigger and bigger every year, given that the company is making a profit and that you choose not to take any dividend. When the time comes, you can choose to distribute all or part of your saved dividend room at the same lower interest rate of 20% as before.
It is perfectly possible to pay out more than the calculated limit. However, the part of the dividend that exceeds the limit will be considered as income from services and thus taxed at around 32-57%, depending on the total income from services you had in the same year. In other words, from a purely tax perspective, it is not very advantageous to take dividends larger than the threshold amount.
Economics can be as complicated as it is simple, as fun as it is boring. Wherever you are on the pendulum, we at Saldo are here for you. We're more than happy to help you with your accounting and provide advice, support and ideas so you can make the most profitable decisions for you and your business. Get in touch via our contact form and we'll take it from there.