Salary or dividends: how UK company directors pay themselves

Why is paying yourself from a company different?

A limited company is a separate legal person. Its money belongs to the company, not to you, even if you own all the shares.

That means you cannot simply move money to your own account as a sole trader might. GOV.UK explains that money comes out of a company in recognised ways, mainly salary, dividends or a director’s loan.

Each route has its own tax treatment and paperwork. Most small company directors use more than one.

How does a director’s salary work?

A salary makes you an employee of your company as well as a director. The company registers as an employer and runs PAYE, deducting Income Tax and National Insurance before you are paid.

The company also pays employer’s National Insurance on salary above a threshold [VERIFY WITH HMRC / ADAM]. Salary and employer’s National Insurance are usually business costs that reduce the company’s taxable profit.

A salary can also count towards your National Insurance record, which matters for the State Pension and some benefits. The level that achieves this is [VERIFY WITH HMRC / ADAM].

How do dividends work?

A dividend is a payment to shareholders out of the company’s profits. It is paid after Corporation Tax, so it does not reduce the company’s tax bill.

You pay Income Tax on dividends personally, at dividend rates that differ from the rates on salary [VERIFY WITH HMRC / ADAM]. There is a dividend allowance, and its current amount is [VERIFY WITH HMRC / ADAM]. GOV.UK covers this under tax on dividends.

No National Insurance is due on dividends. That difference is one reason many directors take part of their income this way.

What are the legal rules for paying a dividend?

A dividend can only be paid from distributable reserves. Broadly, these are profits from the current and earlier years, after tax, that have not already been paid out.

GOV.UK says the company must hold a directors’ meeting to declare a dividend and keep minutes, even if you are the only director. It must also issue a dividend voucher for each payment.

A dividend paid without enough reserves may be unlawful and could have to be repaid. HMRC may also look at how it should be treated. The outcome depends on the facts.

• Up-to-date management figures showing available profit.
• Board minutes declaring each dividend.
• A dividend voucher for each shareholder and payment.
• Payments in line with each shareholder’s holding, unless share classes differ.

How do salary and dividends compare?

The table compares the two routes on how they work, not on rates. Current figures change and should be checked each tax year.

Is there an ideal salary level?

There is no single figure that suits every director. The right level depends on your other income and whether the company can claim the Employment Allowance [VERIFY WITH HMRC / ADAM].

It also depends on whether there are other directors or employees on the payroll. Rates and thresholds for salary, National Insurance and dividends change, sometimes in the middle of planning.

Any comparison needs current figures and your actual profit. A level that suited last year may not suit this one. Treat any salary figure you read online as a starting question, not an answer.

What else affects the mix?

Tax is only part of the picture. Personal plans often shape how much you take out and in what form.

• Applying for a mortgage, where lenders look at your income history.
• Pension contributions, which the company can sometimes make directly.
• Other shareholders, such as a spouse or business partner.
• Student loan repayments, which can apply to salary and dividends.
• How much cash the company needs to keep for tax and growth.

When should you review how you pay yourself?

A review makes sense before each new tax year, when rates and thresholds may change [VERIFY WITH HMRC / ADAM]. It also makes sense when profit rises or falls sharply.

Other triggers include taking on staff, adding a shareholder or planning a large personal purchase. Reviewing before you act gives you room to change the mix cleanly.

What is a director’s loan account?

A director’s loan account records money moving between you and the company outside salary, dividends and expense claims. If you take out more than you have put in, you owe the company.

GOV.UK explains that director’s loans have their own tax rules. An overdrawn balance left unpaid after the year end can create a tax charge for the company [VERIFY WITH HMRC / ADAM].

A large loan can also count as a benefit in kind for you personally, with reporting duties [VERIFY WITH HMRC / ADAM]. Keeping the account up to date avoids surprises at the year end.

How does AFE help directors pay themselves?

AFE Accountants is an ACCA member firm led by Adam Feyzi FCCA. It works with directors of small limited companies across the UK.

Its payroll service covers running PAYE for directors and staff. Its tax and VAT service covers Corporation Tax and personal tax returns, where dividend income is reported.

Fees are agreed in advance as [FEES MODEL: confirm with Adam]. Read more on the business owners page, or book a free consultation to talk through your own figures.