Dividends or Salary?

May 2013

Operating via a limited company can be advantageous- particularly when it comes to reducing your tax bill. Owner-managers, however, need to think carefully about their remuneration package so that they are fully aware of the tax implications of their decisions. In this article, we contrast the differences between dividends and salary or bonus and will highlight the things you need to be aware of.


If you are looking to pay a salary to anyone and it equates to more than the Lower Earnings Limit (currently £109 per week), the company will need to register as an employer. This means it will have to report to HM Revenue & Customs (HMRC) when staff are paid and undertake payroll calculations.

From April 2013, employers must report online to HMRC on or before payments are made to employees- which includes directors. Even if no payments are made there remains a reporting requirement, although there are annual scheme options which we can reduce the frequency of reporting. This revolutionary new system is called Real Time Information and is the biggest change to the PAYE system since its inception in the 1940s.

Salary is subject to income tax and National Insurance; both employees’ and employers’. But salaries, bonuses and employers’ National Insurance should be tax deductible expenses for the company and increase the amount of contributions that can be paid into a personal pension.


If you have no other income subject to National Insurance, paying a salary of at least the Lower Earnings Limited (currently £109 per week) will ensure that your entitlement to state benefits is preserved and may not trigger any tax or National Insurance whatsoever depending on your circumstances.


Dividends are payable out of post-corporation tax profits. The levels and timings of dividend are set by the directors and are paid to shareholders according to the number of shares they hold. Shareholders need not be directors; and vice versa. Dividends should be documented by way of a dividend voucher and board minute.

Dividends tend to be advantageous because the income tax rates applicable are lower than that of normal income tax rates and they do not attract National insurance. Furthermore, they are deemed to have been paid net of a 10% notional tax credit, which helps to reduce your income tax liability, possibly right down to nil.


Let us compare what would happen to £80,000 of pre-corporation tax profits if we were to extract it via wages, dividends or a mixture in a single director-shareholder company:




Salary of £7,696; rest as dividends

Gross pay excl. employers’ National Insurance/ profits




Personal tax and National Insurance




Corporation tax




Net income after taxes




This table is purely for illustrative purposes only. It assumes the director-shareholder has no other income, profits have been generated evenly through the period and is based on the current rates for 2013/14. Corporation tax has been based on the small companies’ rate in force at the time of publication.

You can see that extracting the profit by way of a dividend saved over £9,000 in tax overall. But taking a mixture of both dividends and salary saves a further £1,300 and also preserves the director-shareholder’s entitlement to state benefits.

We can help

There are numerous factors that should be taken into account when deciding how to extract profits from the business, and in reality a mixture of salary and dividend is probably the most tax efficient and appropriate course of action. Extraction of profits is a complex area so you should seek professional advice from your local TaxAssist Accountant.

If you are new to contract work then we can also do the following for you:

Your TaxAssist Accountant gives you peace of mind that your affairs will be handled accurately and in a timely fashion, which leaves you to concentrate on delivering on your contracts.