Salary or dividend: what’s the most tax efficient option for directors?

Salary or Dividend: What’s the Most Tax Efficient Option for Company Directors?

Xeinadin Group



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For many years, the consensus on remuneration for company directors has been clear – if you want to minimise your tax liabilities, make use of dividends.

Dividends are the distribution of a company’s profits after tax to shareholders, including owners and directors. Dividend payments are subject to Income Tax, but at a lower rate than standard. Dividends are also not subject to National Insurance Contributions (NIC).

These two facts alone mean that company directors have often been able to reduce their tax liabilities by paying themselves in dividends rather than a salary. It is also common for directors to use a combination of both options, for example paying themselves a salary up to the NIC threshold (£12,570) and then drawing dividends after that.

However, changes to the tax regime for the current tax year have blurred the picture on whether dividends offer the more tax-efficient option. Here’s what you need to know.


The two headline tax benefits of dividends we’ve already mentioned still apply – no NICs, and lower Income Tax rates. At the basic rate tax band, this saving is significant. Up to earnings of £50,270, tax on dividends is paid at 8.75%, compared to 20% on salaries. There is also an additional tax-free allowance on dividends in addition to the standard personal allowance, although this year that has been cut from £2000 to £1000. So you don’t start paying tax on earnings from dividends until you reach £13,751.

The higher band dividend rates are also better than standard Income Tax, although the difference is not as pronounced. In the Higher Rate earnings band (£50,271 to £125,140) it’s 33.35% compared to 40%. And the Additional Rate (for earnings over £125,140) is 39.75% on dividends, compared to 45% standard.

However, these benefits have to be understood in the context of how dividends relate to a company’s other tax liabilities. Dividends are only paid out on profits after tax. So for a start, a company has to have made a profit to pay out a dividend. And you can only take out dividends up to the total profits made. If you’re the sole director of a company that makes a £25,000 profit, for example, you can only pay yourself a maximum dividend of £25,000. Dividends obviously get reduced the more shareholders you have to pay out to.

This also makes the income you can draw from dividends unpredictable. They can go up and down dramatically every year depending on how a business performs.

The fact that dividends are paid after tax is also important. This means dividends have no impact on Corporation Tax. Which is worth considering now that Corporation Tax rates have gone up.


The Income Tax and NIC liabilities on drawing a salary may be higher. But a key benefit for directors is that earnings from salaries are stable – you can pay yourself the same amount every year, regardless of profitability. It’s therefore advisable for any company director to take at least some payment in the form of a salary, to provide a buffer against poor years where they might only be able to take small dividends, or even none at all.

A salary is also taken out of revenue before tax. So it lowers the Corporation Tax bill. Now that the main rate of Corporation Tax has gone up from 19% to 25%, it could work out more tax efficient to pay yourself a higher salary and a smaller dividend, especially if salary payments drop taxable profits below the £250,000 main rate threshold.

For more advice on tax planning, contact Xeinadin Group today.


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