If you run your business through a UK limited company, one of the most common questions is, should I pay myself a salary, take dividends, or use a combination of both?
There is no single answer that works for every company director. The right approach depends on your company’s profits, your personal tax position, National Insurance, and how much you actually need to take from the business.
Understanding the difference can help you make more informed decisions about how you take money from your company.
Salary vs Dividends: What’s the Difference?
A salary is treated as an employment expense for your company. Your company can generally deduct qualifying salary costs when calculating its taxable profits.
Dividends are different. They are distributions of profit to shareholders and can only be paid when the company has sufficient distributable profits.
This distinction is important because you cannot simply withdraw money from your company and call it a dividend.
How Does Paying Yourself a Salary Work?
As a director, you can receive a salary through your company’s payroll.
Salary is normally subject to Income Tax and National Insurance, depending on the amount you receive and your circumstances.
Your company also needs to deal with its employer payroll obligations.
One potential advantage of salary is that it can count towards certain National Insurance contribution records and can provide a regular, predictable income.
For some directors, taking a salary also makes sense because the company can generally treat it as an allowable business expense, subject to the normal rules.
What About Dividends?
Dividends are paid to shareholders from available profits after the company’s relevant expenses and taxes have been accounted for.
Unlike salary, dividends are not normally treated as a business expense when calculating Corporation Tax.
However, dividends are taxed differently from employment income, which is why many company directors consider a combination of salary and dividends.
Dividends also have specific legal and administrative requirements. Your company should have sufficient distributable profits and appropriate records should be maintained.
Why Do Many Directors Use a Combination?
For many owner-managed companies, the choice isn’t necessarily salary or dividends.
It can be salary and dividends.
A director may take a salary through payroll and then receive dividends when the company has sufficient profits available for distribution.
The balance can depend on:
- Company profits
- Corporation Tax
- Personal Income Tax
- Dividend tax rates
- National Insurance
- Your other sources of income
- Your personal allowance and tax band
- How much money you need to take from the company
Because these factors can change, the most tax-efficient approach can also change from year to year.
Don’t Forget Your Personal Tax Position
One of the biggest mistakes directors can make is looking only at the company’s tax position.
Your personal circumstances matter too.
For example, if you have income from another job, rental property, investments, or another company, this can affect the tax you pay personally.
The amount of dividend tax you pay depends on your overall taxable income and the dividend rates that apply for the relevant tax year.
That’s why copying another business owner’s salary and dividend strategy isn’t necessarily appropriate for your company.
Can You Just Take Money From the Company?
This is where directors need to be particularly careful.
Money in your company’s bank account isn’t automatically your personal money.
If you take money from the company that isn’t salary, a dividend, reimbursement of a legitimate business expense, or another properly documented payment, it may need to be treated as a director’s loan.
Director’s loan accounts can create additional tax and reporting implications if they are not managed correctly.
Keeping company and personal finances clearly separated makes it much easier to maintain accurate accounts and avoid problems later.
What Should You Consider Before Deciding?
Before deciding how much to take as salary and dividends, consider:
1. How profitable is the company?
Dividends can only be paid from available distributable profits. Your accountant should check the company’s accounts before dividends are declared.
2. How much do you actually need?
Taking more money out of the company isn’t always necessary. Leaving funds in the company may sometimes be appropriate for working capital, future investment or tax liabilities.
3. What other income do you have?
Your personal tax position is based on more than just what you take from your company.
4. What are the current tax rates and thresholds?
Tax rates, allowances and National Insurance thresholds can change, so an approach that worked previously may not remain the most appropriate one.
5. Are you keeping the correct records?
Salary should be processed correctly through payroll, while dividends require appropriate documentation and evidence that the company had sufficient profits available.
There Isn’t a One-Size-Fits-All Answer
The most important thing to remember is that salary vs dividends isn’t simply a choice between two tax rates.
The right approach depends on the relationship between your company finances and your personal tax position.
For some directors, a relatively small salary combined with dividends may be appropriate. For others, different circumstances could make another approach more suitable.
The key is to review the numbers rather than automatically following what another business owner is doing.
Need Help Deciding How to Pay Yourself?
If you’re a UK limited company director and you’re unsure whether your current salary and dividend strategy still makes sense, it may be worth reviewing it before making your next payment.
At Future Cloud, we can help you understand your company numbers, plan your tax position and make informed decisions about taking money from your business.
Take the Financial Health Scorecard and find out how financially healthy your business really is.
LINK HERE: https://go.future-cloud.co.uk/business-financial-health-check
Get in touch with our team today to find out how we can support you!
info@future-cloud.co.uk
Your friendly, forward-thinking accountants!
Want more advice and the latest accounting news?
Sign up to our monthly newsletter here! Especially useful for business owners!
And don’t forget to follow us on social media for the latest updates, tips, and more!
