Should I pay myself salary or dividends from my UK limited company?
Many directors take a modest salary and the rest as dividends. Salary is a business expense and builds National Insurance credits toward your State Pension. Dividends can only come from profit left after Corporation Tax, and are taxed at dividend rates. The right mix depends on your profit and the current thresholds, so set it with your accountant each tax year.
How a director’s salary works
You run it through PAYE like any employee. The company deducts it as a cost, and a salary at the right level protects your National Insurance record for the State Pension.
How dividends work
Dividends are paid from the company’s profit after Corporation Tax. There is no National Insurance on them, and they are taxed at dividend rates on your personal return.
Only pay dividends you can afford
A dividend paid when the company does not have enough profit to cover it is unlawful and may have to be repaid. Check the accounts before declaring one, and record it properly.
Watch the director’s loan account
Money you take that is not salary or a proper dividend goes into your director’s loan account. An overdrawn balance can bring extra tax if it is not cleared in time.
Also asked
- Why not take everything as dividends?
- A small salary is usually tax efficient and protects your State Pension record. Your accountant can set it at the right level for the current year.
- How often can I pay dividends?
- As often as the company has the profit to cover them, with each one properly declared and recorded.
- Does this apply to a sole trader?
- No. Sole traders pay Income Tax on their profit and take drawings. Salary and dividends only apply to a limited company.
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