Why you combine salary and dividends
Explaining why taking money out of the company in this way is tax-efficient
Most director-shareholders take a small salary plus dividends rather than a large salary. This combination minimises National Insurance contributions and takes advantage of lower dividend tax rates compared to income tax on salary.
The tax on salary above the optimal level
Salary is subject to Income Tax via PAYE and National Insurance contributions (NIC) from both you and the company. Above the Personal Allowance, Income Tax at 20% applies in the basic rate band and 40% in the higher rate band. Employer NIC at 15% applies above £5,000. Employee NIC at 8% applies above £12,570 and at an additional 2% above £50,270. Together, these make taking large sums as salary expensive.
The tax on dividends
Dividends are paid from post-Corporation Tax profits. No NIC applies. The first £500 of dividends is tax-free (the dividend allowance). Above this, dividend tax is 10.75% in the basic rate band (income below £50,270) and 35.75% in the higher rate band. These rates are significantly lower than the equivalent rates on a salary.
💡 Good to know: The optimal salary and dividend split changes each year as thresholds change. We confirm the recommended levels for each customer at the start of every tax year, usually in March or April.
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