Tax Advisory
Salary vs dividends.
How directors should actually pay themselves.
Why not just take a salary?
Salary is subject to Income Tax and both employee and employer National Insurance, which makes it one of the least tax-efficient ways to extract profit once you're above a small threshold.
Why dividends are usually more efficient
Dividends are paid from profit after Corporation Tax and aren't subject to National Insurance, and they're taxed at lower rates than salary. The catch: you need enough retained profit to pay them, and unlike salary, they're not a deductible business expense.
The combination most directors use
Most directors take a small salary up to the National Insurance or Personal Allowance threshold — it's a deductible business expense and keeps you qualifying for state pension credits — then top up with dividends for the rest.
Why the standard advice doesn't always apply
In recent years, HMRC has increased both Corporation Tax and dividend tax rates, so a small salary topped up with dividends isn't automatically the most tax-efficient setup anymore. Depending on your numbers, a higher salary can work out better — particularly if your company qualifies for the Employment Allowance and can avoid paying employer National Insurance on it. This varies business by business, so it's genuinely a case-by-case calculation rather than a one-size-fits-all rule.
The cash flow trade-off
Paying yourself a salary also affects cash flow. Income Tax on salary is paid to HMRC regularly throughout the year via PAYE, rather than twice a year through Self-Assessment on 31 January and 31 July — worth factoring in when deciding how to structure your pay.
Where people get it wrong
Getting the split wrong — or not adjusting it as profits, allowances and rates change each year — is one of the most common ways directors quietly overpay tax.
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