Dividend Or Salary

If you run a small family run business you can pay yourself either via remuneration or via dividends.

The freedom to use the company profits in the most tax-effective way has long been the goal of many owners. HMRC have sought to challenge this in some circumstances such as under the ‘settlement legislation’ and special rules apply now to personal service companies and managed service companies

When considering how much to take as salary and how much as dividend there are various factors to consider:

The tax treatment and national insurance contributions are different

Dividends are regarded as unearned income. Only earned income is taken into account in calculating the maximum relief in relation to contributions into a registered pension scheme. Therefore taking a low salary will restrict the tax efficiency of pension contributions.

The National Minimum wage also needs to be considered although current guidance has indicated that a director who does not have an explicit employment contract is highly unlikely to be subject to the national minimum wage.

in 2012-13 profit taken as pay attracts 13.8% NI Company contributions on pay over £144 per week (although it is a tax deductible expense for corporation tax). Pay also attracts an employee contribution of 12% on earnings between £146 to £817 per week and 2% on pay over this.

Dividends are not deducted in calculating profits to be charged to Corporation tax. If you are a basic rate tax payer and your total income is within the basic rate band there will be no further tax to pay on your dividends

Depending on how much money needs to be taken out a separate calculation needs to be performed to determine the most tax beneficial way.

In most cases it is more tax efficient to take dividends than salary mainly as a result of the national insurance contributions

If you need further help please do not hesitate to contact me on [email protected] or call me on 0845 680 7084


Paul Marks & Co Chartered Accountants is the trading name of Paul Marks Ltd a Limited Company registered in England and Wales (registered number 4487645). This article is designed for the information of readers only and readers should not act on any of the information contained in this article without seeking professional advice. Nothing in this article constitutes advice, nor does the transmission, downloading or sending of any information or the Material create any contractual relationship. Links to third party websites are provided as a convenience to the reader, Paul Marks Ltd does not control and is not responsible for any of those websites or their content. Paul Marks Ltd accepts no liability or responsibility whatsoever for any loss or damage suffered by any user of the information contained on or accessed through this article or the Material downloaded.