The short answer: there is no single right mix. Directors of small limited companies are often paid a combination of salary and dividends, and the best balance depends on the company's profits, your other income and what you want to do with the money. Because rates and thresholds change, it is worth reviewing every year.
How salary and dividends differ
- Salary is paid through payroll. It is a cost to the company, and it is subject to PAYE tax and National Insurance rules.
- Dividends are a share of the company's profits paid to its shareholders. They are paid after the company has paid Corporation Tax on its profits, and they are taxed in a different way from salary.
What to think about
- How much profit the company makes, and whether it will stay profitable.
- How much you need to take out to live on, and how much can stay in the business.
- Your other income, such as a partner's income or rental income, which can change your overall tax.
- Your pension and National Insurance record, because a salary can affect what you build up.
- Current rates and thresholds, which the government can change, so check before you decide.
- Whether you plan to borrow, for example a mortgage, because lenders assess income in different ways.
Doing it properly
Dividends must be paid out of the company's profits and properly documented. Taking money out in another way, without it being salary or a dividend, can create a director's loan with tax consequences. Ask us before you take money out in an unusual way.
Review it each year
The right answer changes as your company grows and as the rules change. We look at your figures with you at the start of each tax year and before your year end. See our annual accounts and Corporation Tax service, or read sole trader or limited company?
This guide deliberately quotes no rates or thresholds, because they change. Check gov.uk for the current figures or speak to us.
Common questions
Is a dividend always better than a salary?
Not always. It depends on your profit, your other income and your circumstances, and the rules change. That is why we review it with you each year.
Can I pay myself a dividend if the company made a loss?
Dividends must come from profits available to distribute. If you are not sure, ask us before paying one.
Do I have to run payroll if I am the only director?
If the company pays you a salary, payroll usually has to be registered and reported to HMRC. We can set this up for you.
General information only, not personal advice. Tax rules, rates and thresholds change, so check gov.uk or speak to us about your own situation.