As a director and shareholder of your Limited company, you have the option to pay yourself using a combination of salary and dividends. The best way to do this will depend on your situation, so in this article we’ll explain the process you might go through when making this decision.
What’s the difference between salary and dividends?
Before diving into the decision-making process, it’s important to understand what we mean by “salary” and “dividends”.
Salary: A fixed amount paid regularly to an employee, subject to income tax and National Insurance contributions (NICs). Employers are also responsible for paying employer NICs on employee salaries. In this case you would be the employee and your company would be the employer.
Dividends: Payments made to shareholders from a company's profits after taxes. Dividends are subject to different tax rates than salaries and are taxed under the dividend tax system.
So, how do you go about deciding on your salary and dividend strategy?
Assess your personal financial needs
Looking at your expenses and financial objectives, how much money do you need to take out of your company? If you have more than this available, you might take more in salary or dividends, or you might decide to keep reserves in your company but it’s important to know how much you need to be paid.
Decide what your goal is
It’s easy to assume that every client wants to pay as little tax as possible, but a significant number have other priorities. For example, you might need a minimum salary to support a mortgage application, or you might want to protect your entitlement to state pension or other contribution-based benefits. Your strategy might change depending on what you’re trying to achieve.
Understand the tax and NIC thresholds
In tax year 2024/25, employer’s NICs (paid by your company at 13.8%) are due on salary over £9,100. This would usually be offset by a Corporation Tax saving of 19%.
The personal income tax rates and thresholds for 2024/25 are as follows:
Tax rate | Threshold |
0% | £0-£12,570 |
20% | £12,571-£50,270 |
40% | £50,271 - £125,140 |
45% | £125,140 onwards |
The employee NIC thresholds are as follows:
NIC Rate | Threshold |
0% | £0 - £12,570 |
8% | £12,571 - £50,268 |
2% | £50,269 onwards |
Work out how much you can pay in dividends
Dividends are payments to shareholders from your company’s profits after taxes. They’re distributed according to how much of the company each shareholder owns, so if you own half your company, you’ll get 50% of any dividend payment. Your share-structure and the value of after-tax profits available will affect your strategy.
Put it all together
Once you know how much you need to be paid, what your priorities are, and how much your company can pay in dividends, you can determine the best salary/dividend strategy, with reference to the tax and NI thresholds.
We would suggest that you discuss this in detail with your accountant before making any firm decisions.
If you have questions or if we can help in any way, please call our expert team on 01296 468 185 or email accountancy@orangegenie.com.