Should I Pay Myself Salary or Dividends?

There are a number of ways you can structure your company, including sole trader, partnership, and limited company – to say a few. For people who choose to structure their business as a Limited Company, there are a few different options available when wanting to pay themselves. If you are a director and shareholder of your company you can choose to pay yourself a salary, take money in the form of dividends or a mixture of the two. Since these levels will depend upon your income and your own personal circumstances, the best way will be unique to you and your company.

To help you decide the most tax efficient structure for you and your company, we’ve put together some advice.

What are dividends?

Dividends are an alternative way of paying yourself using the profits from your company. Limited companies can issue dividends at the end of the financial year, and at points throughout the year, which is common when the directors or shareholders rely on this for income. As long as your company is turning a profit and you have the cash available to do so, you should be able to draw dividends.

You can find more information in our comprehensive guide.

How are salary and dividends taxed?

Dividends work differently than a PAYE salary because they are not liable for any National Insurance and less Income Tax than a salary. Instead, they are drawn from the company and added to your SATR for the year, where the relevant tax due will be calculated. This makes them an attractive option for limited company directors.

What is the tax allowance for dividends?

TABLE

(correct for the 2022/23 tax year)

Salary, on the other hand, is liable for tax and National Insurance contributions, which will be taken as a proportion of your earnings.

What is the tax allowance for salary?

The tax thresholds are currently as follows:

TABLE

Should I pay myself a salary or dividends?

Paying yourself via a salary can be a cost-effective way of drawing money out of your company, but as you pass the National Insurance threshold, your tax efficiencies may begin to decrease.

The personal allowance rate rose from £12,500 to £12,570 in 2021 and is fixed until 2026. The tax-free dividend allowance has remained at £2,000 since 2020, this will change to £1,000 in April 2023. The changes in allowance means that it could actually be more tax efficient to pay yourself a larger salary and reduce your level of dividends for the financial year.

Ultimately, deciding whether to pay yourself a salary or dividends will depend on your circumstances, your level of income and the tax bracket you fall into.

Utilising a tax efficiency structure

Though personal circumstances are different for each person, some find that paying themselves a combination of dividends and salary is the most tax-efficient way of working. This involves the director/shareholder paying themselves a salary up to the tax-free allowance and subsidising the rest of their profit via dividends and is a popular method of working.