Dividend vs Salary Tax UK

Limited Company Director: Maximise Your Take-Home Pay Compare Dividend vs Salary Tax with Our UK Calculator

As a director of your own limited company, you're in a unique position. You get to decide how to pay yourself. But this freedom brings a big question: what’s the most tax-efficient way to take money out of your business? Is it better to take a salary, dividends, or a combination of both?

The answer can mean a difference of thousands of pounds in your pocket each year. Getting it wrong can lead to a hefty, unexpected tax bill.

That's why we've created a simple tool to do the hard work for you. Our free Dividend vs Salary Tax Calculator helps you instantly compare different scenarios to find the perfect balance and maximise your net take-home pay.

How to Use Our Dividend vs Salary Tax Calculator

Our calculator is designed to be straightforward. Just follow these simple steps to see your personalised results.

Step 1: Your Inputs

• Company Profit Before Director's Pay: Enter your company's estimated profit for the year before you've paid yourself any salary. This is the total pot of money available for your remuneration.
• Your Planned Salary: Enter the amount you plan to take as a salary for the year. You can test different amounts here, such as £0, £9,100, or £12,570, to see how it impacts your final take-home pay.

Step 2: Your Results

Once you enter the figures, the calculator will instantly show you a detailed breakdown:

• Total Take-Home Pay: The most important number! This is the total amount of cash you'll have in your personal bank account after all taxes.
• Total Taxes Paid: A summary of all the taxes paid by both you and your company, including Corporation Tax, Income Tax, and National Insurance.
• Detailed Tax Breakdown: You'll see exactly how much Corporation Tax, Employee's National Insurance, Employer's National Insurance, Income Tax, and Dividend Tax you'll pay.

This allows you to quickly see how changing your salary affects your overall tax bill and, most importantly, your final take-home pay.

Understanding the Basics: Salary vs. Dividends

To understand the calculator's results, it helps to know the key differences between salaries and dividends.

What is a Salary?

A salary is a regular payment you make to yourself as an employee of your company.

• It's an allowable business expense, which means it reduces your company's profit and therefore its Corporation Tax bill.
• It's subject to personal Income Tax.
• It's subject to National Insurance Contributions (NICs) for both you (the employee) and your company (the employer).

What is a Dividend?

A dividend is a payment made to shareholders from the company's profits after Corporation Tax has been paid.

• It's not a business expense, so it doesn't reduce your Corporation Tax bill.
• It's subject to Dividend Tax (at lower rates than Income Tax).
• Crucially, there are no National Insurance Contributions to pay on dividends, for you or your company. This is the main reason they are so attractive.

The "Sweet Spot" Strategy: Small Salary, Big Dividends

For most limited company directors, the most tax-efficient strategy is to take a small salary and the rest of their income as dividends.

The ideal salary is usually set at a level that gives you benefits without costing you (or your company) much in tax or National Insurance. This is often:

1. The Secondary Threshold for National Insurance: This is the point at which employees start paying NICs. Taking a salary up to this level means you qualify for State Pension credits without paying any National Insurance.
2. The Personal Allowance Threshold (£12,570): Taking a salary up to this amount means you pay no Income Tax on it. You will pay some NICs at this level, but the salary is still a deductible expense for your company, saving it Corporation Tax.

By taking a small salary, you use up your tax-free Personal Allowance. You can then take the remaining company profits as dividends, which are taxed at lower rates and have their own separate tax-free allowance.

Let's see this in action.

Worked Example: £80,000 Company Profit

Imagine your company makes a profit of £80,000 before you pay yourself. Let's compare two simple scenarios. (Note: These are simplified examples for the 2024/25 tax year. Rates can change).

Scenario 1: Taking a £12,570 Salary + Dividends

• Company Profit: £80,000
• Salary: £12,570
• Employer's NI: £0 (as it's below the threshold)
• Profit after salary: £80,000 - £12,570 = £67,430
• Corporation Tax @ 19%: £67,430 x 19% = £12,811.70
• Profit available for dividends: £67,430 - £12,811.70 = £54,618.30
• Your Personal Taxes:
  • Income Tax on salary: £0 (it's within the Personal Allowance)
  • Employee's NI on salary: £358.80
  • Dividend Tax on £54,618.30: £4,183.81
• Your Total Take-Home Pay: £66,653.69

Scenario 2: Taking a £50,000 Salary + Dividends

• Company Profit: £80,000
• Salary: £50,000
• Employer's NI: £5,644.20
• Profit after salary & Employer's NI: £80,000 - £50,000 - £5,644.20 = £24,355.80
• Corporation Tax @ 19%: £24,355.80 x 19% = £4,627.60
• Profit available for dividends: £24,355.80 - £4,627.60 = £19,728.20
• Your Personal Taxes:
  • Income Tax on salary: £7,486
  • Employee's NI on salary: £3,744
  • Dividend Tax on £19,728.20: £1,614.33
• Your Total Take-Home Pay: £56,883.87

As you can see, the low-salary, high-dividend strategy results in almost £10,000 more in your pocket. Our Dividend vs Salary Tax Calculator runs all these numbers for your specific situation in seconds.

Common Mistakes to Avoid

1. Taking Illegal Dividends: You can only pay dividends from post-tax profits. If your company doesn't have enough profit, any dividend you take could be classed as an illegal "ultra vires" payment, which can have serious consequences.
2. Forgetting Paperwork: To pay a dividend legally, you must hold a board meeting to declare it and keep minutes of that meeting. You also need to issue a dividend voucher for each payment.
3. Ignoring Pensions: Company pension contributions are an extremely tax-efficient way to extract money. They are an allowable business expense (reducing Corporation Tax) and are not subject to Income Tax or NICs. This should be part of your overall remuneration strategy.
4. Mixing Up Tax Deadlines: Remember you have different deadlines for paying Corporation Tax, Income Tax (via Self Assessment), and National Insurance.

What to Do After You Get Your Result

The calculator gives you the numbers, but what's next?

• Speak to an Accountant: Our calculator is a brilliant guide, but an accountant can provide tailored advice for your specific circumstances, including other tax planning opportunities.
• Plan Your Annual Strategy: Use the results to decide on your salary level for the financial year.
• Set Up Your Payroll and Dividend Payments: Ensure you have the systems in place to pay your salary (and report it to HMRC via RTI) and to properly document your dividend payments.

Related Protection: Securing Your Financial Future

Maximising your take-home pay is vital, but so is protecting it. As a company director, you often don't have the safety net of sick pay or death-in-service benefits that traditional employees enjoy. This is where personal insurance comes in.

It's a separate but crucial consideration. Private Medical Insurance (PMI) can give you and your family fast access to specialists and treatment for acute conditions that arise after you take out the policy. It’s important to know that UK PMI does not cover pre-existing conditions you already have, or long-term chronic conditions like diabetes or asthma.

Similarly, Life Insurance provides a tax-free lump sum for your loved ones if you were to pass away, ensuring they are financially secure.

At WeCovr, we are expert brokers who can help you compare quotes from leading UK insurers for both PMI and life insurance. If you buy a policy through us, we can often offer discounts on other types of cover you might need. What's more, all WeCovr customers get complimentary access to CalorieHero, our AI-powered calorie and nutrition tracking app, to help you stay on top of your health goals.

Frequently Asked Questions (FAQ)

What is the most tax-efficient way to pay myself as a limited company director? For most directors, the most tax-efficient method is to take a small salary (typically up to the National Insurance threshold) and the remainder of their income as dividends. This strategy minimises National Insurance payments and takes advantage of lower dividend tax rates.

Do I have to pay National Insurance on dividends? No. There are no National Insurance Contributions (NICs) due on dividend payments, for either the individual or the company. This is the primary reason they are a tax-efficient way to extract profit from a company.

Is a higher salary better for getting a mortgage? It can be, but it depends on the lender. Some mortgage lenders prefer a higher basic salary as it looks more stable, while many specialist lenders who work with company directors understand the salary-plus-dividend structure. They will typically look at your salary and share of net profit or dividends over the last 2-3 years. It's best to speak to a mortgage broker who specialises in contractors and directors.

Can I take a dividend whenever I want? You can take a dividend at any time, provided your company has sufficient post-tax profits to cover the payment. You must follow the correct legal procedure: hold a board meeting, declare the dividend, and create a dividend voucher. You cannot pay a dividend if your company is not profitable.

Ready to stop guessing and start maximising your income?

Find out exactly how a different salary and dividend mix could affect your pocket. It takes less than 30 seconds.

Use our free Dividend vs Salary Tax Calculator today, and contact the friendly team at WeCovr to discuss protecting your hard-earned income.