For company directors, how you take money out makes a real difference to your tax. Here is how salary and dividends compare, and why most directors use both.
If you run a limited company, you can usually take money as salary, as dividends, or as a mix of both. They are taxed differently, so the blend matters. Most directors use a combination to make the most of the allowances.
Here is how the two compare. The right mix changes as allowances change, so it is worth reviewing each year.
A salary is useful up to a sensible level, often around the point where it builds your State Pension record and is a deductible company cost, without triggering much National Insurance. It is reliable and works even when profits are low.
Dividends are useful for taking profit beyond a modest salary, because they are taxed at lower rates and carry no National Insurance. They can only be paid from profit after corporation tax, and the small dividend allowance means planning matters.
Most directors take a modest salary plus dividends, which uses the allowances and keeps the overall tax efficient. The exact mix depends on your profit and the current allowances, which change, so it is worth reviewing every year. We work out an efficient, compliant split for you.
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