If you run your own limited company, you choose how to take money out of it. Most directors use a mix of a modest salary and dividends, sometimes with company pension contributions. The right mix depends on your profits, your other income and your plans, and it is worth reviewing every tax year.
Salary
A salary is a business expense, so it reduces the company’s Corporation Tax. It also counts towards your National Insurance record for the State Pension. Above certain levels, though, it brings Income Tax and both employee and employer National Insurance, which is why many directors keep it modest.
Dividends
Dividends are paid from profits after Corporation Tax. They carry no National Insurance and are taxed at dividend rates, which are lower than the rates on salary. They can only be paid when the company has enough retained profit, and each one needs the right paperwork.
Pension contributions
Contributions paid by the company into your pension are usually an allowable business expense and are not taxed as your income when paid in, within the annual limits. They can be an efficient way to extract profit if you do not need the money now.
Questions to ask before you decide
- How much profit will the company make this year, and how much do you need to live on?
- Do you have other income, such as rent or a second job, that changes your tax band?
- Is the company entitled to the Employment Allowance, which can reduce employer National Insurance?
- Are you planning a large purchase, a mortgage application or a new investment soon?
We model a few options side by side with real figures, then agree a plan you can follow through the year without surprises at the end.
This article is general guidance, not advice for your own circumstances. Tax rates and allowances change, so check the current figures before you act.