Salary or dividends? Planning director remuneration

If you run your business through a limited company, you have a choice about how you pay yourself. Most owner-directors take a combination of salary and dividends, but the right balance depends on your circumstances and changes as tax rates and allowances change.

How salary works

• Salary is a deductible expense for the company, so it reduces Corporation Tax.
• It is paid through payroll, with Income Tax and National Insurance applied above the relevant thresholds.
• A salary above the lower earnings limit can protect your entitlement to the State Pension.
• Regular salary can make it easier to evidence your income, for example when applying for a mortgage.

How dividends work

• Dividends are paid from profits after Corporation Tax, so they do not reduce the company's tax bill.
• No National Insurance is due on dividends, and they are taxed at dividend rates after the dividend allowance.
• A company can only pay a dividend if it has enough distributable profits.
• Each dividend should be properly declared and documented, with board minutes and dividend vouchers.

Factors that change the answer

There is no single right mix. When we review a director's remuneration, we look at:

• Your other income, such as rental income or a second employment.
• Whether the company can claim the Employment Allowance, which is not available where a director is the only employee paid above the threshold.
• Employer pension contributions, which can be a tax-efficient way to extract value from the company.
• Any other shareholders, and whether income is being shared appropriately.
• Your plans for the business, including whether profits are needed for investment.

Review it every year

Thresholds, allowances and rates are updated regularly, so a mix that worked last year may not be the most efficient today. A short review before the start of each tax year keeps your plan current and avoids surprises.