Salary vs dividends is the decision that changes both your personal tax and the company tax bill. There is no single figure that is right for every director. The usual pattern is a modest salary, then dividends from profit that is actually there, with the split checked each tax year rather than copied from a blog.
What is different about salary
A salary is employment income. The company can usually deduct it when it works out corporation tax, and it goes through payroll with PAYE. Paid at the right level, it keeps your National Insurance record for the state pension without a large employee or employer National Insurance bill. It also counts as earnings for some mortgages, which dividends often do not.
What is different about dividends
A dividend is a share of profit after corporation tax. It does not go through payroll and it does not attract employee or employer National Insurance. You can only pay a dividend if the company has enough distributable profit. Paying one because the bank balance looks healthy, while the accounts still show a loss, is a common mistake.
Above the dividend allowance, currently £500, dividends are taxed at dividend rates, which are lower than salary income tax rates but are charged on top of corporation tax that has already been paid. That is why the comparison is never just the personal tax line.
What we check before you decide
We look at the profit forecast, other income on your self assessment, the personal allowance, and whether a pension contribution would do more than another dividend. The answer in April can be different from the answer in January.
This sits with director tax planning and payroll. If you want the split modelled for this year, book a free accounting review.
