Salary vs Dividends: How Best to Take an Income | Checkatrade
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Salary vs dividends: How best to take an income

As the owner of a limited company, there are various ways you can draw an income. In this post, we look at salary vs dividends, and also pension contributions.

Dividends vs salary, or even pension contributions, what’s the most tax-efficient way for a company director to take an income?

This article will help you to understand the benefits and drawbacks of salary, dividends, and pension contributions.

We always recommend you take professional advice from a qualified accountant before making a decision of this nature.

Dividend vs salary calculator

Rather than taking a salary or dividends, it’s quite common for the director of a limited company to take both.

A director could have a combined income of salary, dividends, and pension contributions.

Whether you’re thinking of taking dividends or salary, an accountant will be able to help best advise you. However, the optimal combination will normally be calculated based on a couple of different factors:

  • Your company profits
  • How much you want to reduce your personal tax bill
  • How much you want to reduce your company tax bill
  • Whether you wish to hold onto certain state benefits, for example, your state pension

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Is it better to pay yourself a salary or dividends?

Still got the question of salary or dividends on your mind?

To help determine whether you should pay yourself a salary or dividends, we’ll first outline the key differences between them.

Dividends – key facts

  • Dividends are taken from your company profits (after corporation tax has been paid) and paid to company shareholders
  • You can earn some dividend income each year, tax-free. In 2023/24 the tax-free allowance for dividend income is £1,000 – this reduces to £500 from 6th April 2024
  • Beyond the tax-free threshold, dividends incur a lower rate of tax than income tax. Tax on dividends over the allowance is subject to your income tax band (basic, higher, or additional rate)
  • There are no National Insurance contributions to pay on dividends 
  • Company directors will decide when and how much to pay out in dividends – typically monthly or quarterly
  • Dividend income from assets held in an ISA are tax-free

Salary – key facts

  • A regular salary transfer from your company to personal account will help build up qualifying years towards your state pension
  • It will also help you to hold onto certain state benefits, such as maternity benefits
  • It can make it easier to apply for a mortgage
  • A salary is an allowable business expense and can therefore reduce your corporation tax bill
  • Drawing a salary vs dividends means that both you and your company could have to pay National Insurance contributions
  • You have a Personal Allowance on taxable income up to £12,570 (2022/23)
  • Beyond this, income tax is subject to tax rates of 20%, 40%, and 45% depending on your tax band

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Directors dividends vs salary: a summary

It’s fairly standard for company directors to take the bulk of their income from dividends, for tax purposes. However, this should be balanced with salaried income for the reasons outlined above (e.g. pension credits).

It is also possible to take pension contributions directly from your company as a form of tax-efficient remuneration.

Note: this is not a substitute for salary or dividends, as you cannot access your pension until you are 55.

Taking employer pension contributions will not increase your taxes, they can reduce your corporation tax (as an allowable business expense). You’re not limited by the size of the contribution, and there are no National Insurance contributions to make.

If you’re interested in learning more, read our helpful guide on all you need to know about self-employed pensions. 

Combined with taking pension contributions, weighing up dividends vs salary has tax implications that are best discussed with an accountant.

Dividends or salary FAQs

Is it better to pay salary or dividends?

It’s normally more tax-efficient to pay dividends over salary. However, your company must be making a profit (after tax) to do so.

How much tax will I pay on salary and dividends?

You do not pay tax on dividend income that’s within your Personal Allowance. Above this threshold, you pay a lower rate of tax compared with income tax. You do not pay tax on dividends from shares held in an ISA.

Can you take dividends and no salary?

If you take dividends and no salary, your income could be unpredictable as you can only take dividends from profits.

You will also miss out on certain state benefits, such as building up your pension credits. Dividends vs salary is therefore an important matter to consider.

Disclaimer
This information is for guidance purposes only and does not amount to financial or legal advice or recommendation. The content and materials featured or linked to on this blog are for your information and education only and are not intended to address your particular personal requirements. The information does not constitute financial advice or recommendation and should not be considered as such. The Checkatrade website is not regulated by the Financial Conduct Authority (FCA), its authors are not financial advisors, and it is therefore not authorised to offer financial advice. Always do your own research and seek independent financial advice when required. Any arrangement made between you and any third party named or linked to from the site is at your sole risk and responsibility. Checkatrade blog and its associated writers assume no liability for your actions.

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