Salary vs dividends – what’s the perfect mixture for you?
One of the benefits of running a Limited Company is that you’re able to pay yourself a mixture of salary plus dividends in order to optimise your tax efficiency. The optimal amounts you pay will be determined by a number of factors, including your personal financial situation, your tax obligations and business needs.
In this blog we look at how to pay yourself a salary plus dividends to find your perfect mixture, for optimum tax sense.
What are dividends and how do they work?
Dividends are payments made to a Limited Company’s shareholders, as a way of distributing a company’s profits to those who own shares within the company. The amounts you’re able to pay are dependent on the percentage of shares owned. For example, if you are the sole shareholder you are entitled to 100% of each dividend, and if you were to own two thirds of the company you’d receive 66% of each dividend.
Dividend Tax Thresholds (2023/24 financial year):
- The first £1,000 is tax-free
- Tax rates are then determined by the income tax rate you pay, for example:
- Basic-rate taxpayers: 8.75% (for incomes up to £50,270)
- Higher-rate taxpayers: 33.75% (for incomes from £50,271 to £125,140)
- Additional-rate taxpayers: 39.35% (for incomes £125,141 and above)
Why should you pay yourself a mixture of salary and dividends?
By paying yourself a small salary, you’re effectively able to ‘top-up’ your income by paying yourself dividends. By doing so you’ll end up paying a far smaller amount of combined tax and National Insurance Contributions (NIC), than say if you were to pay yourself a larger salary. This is because:
- You don’t pay National Insurance on dividends
- You’re able to minimise your personal tax liability
- By taking a salary (as long as it’s at least £6,240) you’ll still be eligible for state pension
- Your company is able to reduce its Corporation Tax by claiming the cost of your salary, therefore saving the company money
- You’re able to pay yourself in dividends up to the level of post-tax profit in your company
Why shouldn’t you just pay yourself a salary?
Paying yourself a mixture of both salary and dividends will give you the maximum tax benefits, and therefore by only paying yourself a salary, you’re missing out financially. By paying yourself a higher salary that’s greater than the National Insurance threshold you’ll also be subject to paying both employer’s and employee’s NIC’s (which will be a % of your earnings).
Salary tax allowance – for the tax year 2023/24
- The personal allowance – you pay nothing up to the value of £12,570
- Basic rate tax payers – 20% – up to the value of £50,270
- Higher rate tax payers – 40% – from £50,271 to £125,140
- Additional rate taxpayers – 45% £125,141 and above
An example of salary vs dividends – what your take home pay will be
The following examples give you an idea of how much tax you’d pay if you were only taking a salary, and also if you were to take a combination of a salary plus dividends.
Salary only
| Gross income (your salary) | Tax | NI | Take Home |
| £45,000 | £6,484 | £3,729 | £34,787 |
| £50,270 | £7,538 | £4,335 | £38,397 |
| £55,000 | £9,428 | £4,429 | £41,143 |
| £70,000 | £15,428 | £4,729 | £49,843 |
Salary plus dividends
| Gross income | Salary | Dividends | Tax | NI | Take home |
| £45,000 | £9,100 | £35,900 | £3,054 | – | £41,946 |
| £50,270 | £9,100 | £41,170 | £3,515 | – | £46,755 |
| £55,000 | £9,100 | £45,900 | £5,111 | – | £49,889 |
| £70,000 | £9,100 | £60,440 | £9,783 | – | £59,826 |
How Aardvark Accounting can help
If you’re new to running a Limited Company and need a little guidance on the best way to pay yourself, the expert team here at Aardvark can help. From getting you set up, to understanding your tax obligations, the Aardvark team are here to help. Get in touch today to find out more, or take a look at the services we offer.
Note: All the information and advice in this blog post was correct at the time of writing.
