If you are a director of a limited company, one of the most important tax planning decisions is how to pay yourself. In many cases, a combination of salary and dividends can be more tax-efficient than taking salary alone.
Salary
A salary is paid through your company’s payroll and is subject to PAYE. It is an allowable business expense for Corporation Tax purposes and may help maintain your National Insurance contribution record.
However, taking a higher salary can result in increased Income Tax and National Insurance contributions for both you and your company.
Dividends
Dividends are payments made from company profits after Corporation Tax has been paid. They are only available if your company has sufficient distributable profits.
Unlike salary, dividends are not subject to National Insurance, but they are taxed under the dividend tax rules.
What Is the Most Tax-Efficient Option?
For many sole directors, a common approach is to take a salary up to the Personal Allowance and then withdraw dividends within the basic rate tax band, where appropriate.
| Allowance / Threshold | Amount |
|---|---|
| Personal Allowance | £12,570 |
| Basic Rate Band | £37,700 |
| Dividend Allowance | £500 |
Many directors with no other taxable income may typically receive a salary of £12,570 and dividends up to approximately £37,700, keeping total taxable income within the basic rate band.
Please note: Dividends can only be paid from profits available after Corporation Tax. Before withdrawing dividends, make sure your company has sufficient retained profits and consider the personal tax implications.
Which Option Is Right for You?
The most tax-efficient strategy depends on company profits, other personal income, pension contributions, student loan repayments, benefits in kind and future business plans.
Frequently Asked Questions
Can I take dividends instead of a salary?
Dividends can only be paid if your company has sufficient distributable profits. Many directors choose a combination of salary and dividends.
Do dividends reduce Corporation Tax?
No. Dividends are paid from profits after Corporation Tax has been calculated and are not an allowable business expense.
Can I change my salary each year?
Yes. Many directors review their salary annually to reflect changes in tax legislation and personal circumstances.