Choosing between taking a salary or paying dividends is a common dilemma in an owner manager’s remuneration planning. Following a range of tax changes in April 2023, our tax experts explore whether salary or dividends is the most tax-effective option to help you decide which is better for you.
If you manage your own business, you need to make sure the way you take income from the company maximises your take-home pay while mitigating large tax liabilities. Choosing between salary versus dividends is an important part of this remuneration planning process.
Dividends have traditionally been the recommended route for business owners, however, tax changes that came into force in April 2023 have made salaries an increasingly attractive option.
Higher Corporate Tax
In April, the main rate for Corporation Tax rose from 19% to 25%. For companies with profits of less than £50,000, a small profits rate was also reintroduced, maintaining the 19% rate.
A marginal relief will apply for companies with profits between £50,000 and £250,000, allowing for the 25% main rate to be applied over time. The Marginal Small Companies Relief is a complex band that requires specialist tax advice, speak to our tax experts if you fall within this category for tailored advice.
The levelling of National Insurance Contributions (NIC) and Income Tax
Income Tax is charged on your total annual income, including salaries and dividends. You can earn £12,570 tax-free through the Personal Allowance – this rate was extended until April 2028 in the Spring Budget 2023.
If your income exceeds £100,000, your Personal Allowance will start to reduce by £1 for every £2 your earnings are over the threshold. This results in an effective tax rate of 60% for people who earn between £100,000 and £125,140.
Additionally, the Additional Rate tax (45%) threshold was reduced to £125,140 from the previous £150,000 limit in April.
Increased primary threshold for National Insurance Contributions (NICs)
In April 2023, the primary threshold for NICs increased to £12,570, meaning NICs become payable at the same stage you begin paying Income Tax.
The NIC secondary threshold for employers has been frozen at £175 per week (£9,100 per year).
View our downloadable Tax Card for a full list of tax rates for 2023/24.
Salaries versus dividends
There are tax-related benefits and disadvantages to both salaries and dividends. Following the changes to Corporate Tax, NIC and Income Tax, we recommend reviewing your existing remuneration strategy to make sure it is still right for you.
Taking a salary from your business
As a director, you may choose to pay yourself a small salary. Salaries beyond the primary threshold are subject to Income Tax and National Insurance Contributions (NICs). Your company will also have to pay NICs if your salary exceeds the primary and secondary thresholds.
Potential benefits to paying yourself a salary include:
- Higher personal pension contributions
- More qualifying years towards your state pension
- Reduced Corporation Tax bill for your company (salaries can be classed as a business expense)
- Salaries can still be taken in circumstances where your business makes no profit.
Paying dividends
Many directors opt for a dividend-focused remuneration plan, as this has traditionally been the most effective strategy.
How are dividends taxed?
Dividends are subject to Income Tax but at lower rates than salaries. In addition, unlike salaries, NICs are not due on dividends.
The current income rates on dividends for 2023/24 can be found below.
| Income tax bracket | Income range | Dividend tax rate |
| Basic rate | £12,571 to £50,270 | 8.75% |
| Higher rate | £50,271 to £125,139 | 33.75% |
| Additional rate | Over £125,140 | 39.35% |
The Dividend Personal Allowance has been halved to £1000 for the 2023/24 tax year, meaning you will be required to pay tax on any dividend income that exceeds this limit. It is due to reduce further to £500 in the 2024/25 tax year.
The company does not receive Corporate Tax relief on dividends.
Other options and considerations
Employer Pensions Contributions
Another option for tax-effective remuneration is making pension contributions directly from your company.
Unlike employee pension contributions, employer pension contributions are not limited to your annual salary. Your company can contribute an amount up to or equal to the Annual Allowance (£60,000 as of April 2023), even if you only pay yourself a small salary.
Employer pension contributions are beneficial because they are not taxable earnings so do not increase your Income Tax bill. They are not subject to NICs and they are considered an allowable business expense so you can save on your Corporation Tax bill too.
The main disadvantage to using pension contributions in remuneration planning is you cannot typically access your fund until at least the age of 55 (age 57 from April 2028). For this reason, pension contributions should not be seen as a replacement for salary or dividends but should be used to support either strategy.
Research and Development (R&D) tax reliefs
If your company undertakes any qualifying R&D work, this could be another factor to consider when deciding between salary versus dividends. The government offers businesses Research and Development (R&D) tax reliefs for qualifying investments in science and technology.
Although dividends are not eligible for R&D tax reliefs, salaries can qualify. Relief rates changed in April – consult our 2023/24 Tax Card to find out more.
Salary versus dividends – which is most tax-effective?
There is no universal answer to the salary versus dividend debate for owner-managers but this year’s tax changes have made it even more important to find the right solution for your business.
The Corporation Tax increase and government U-turn on NICs increase have gone some way to level the playing field between salaries and dividends by practically equalising the effective rate of tax at higher and additional rates for both options, however dividends are more tax efficient at the basic rate.
The examples below demonstrate how your company’s corporation tax rate and your income tax rate affect whether salaries or dividends is a better financial choice for you.
25% corporation tax
If you are an Additional rate taxpayer and your company pays the 25% main rate of corporation tax, you will receive a higher net income from salaries.
| 25% corporation tax | ||||||
| Salary | Dividends | |||||
| Basic rate | Higher rate | Additional rate | Basic rate | Higher rate | Additional rate | |
| Profit | £30,000 | £30,000 | £30,000 | £30,000 | £30,000 | £30,000 |
| Employers NICs (13.8%) | £3,639 | £3,639 | £3,639 | Nil | Nil | Nil |
| Salary | £26,361 | £26,361 | £26,361 | Nil | Nil | Nil |
| Corporation Tax | nil | nil | nil | £7,500 | £7,500 | £7,500 |
| Dividend | nil | nil | nil | £22,500 | £22,500 | £22,500 |
| Tax due | ||||||
| 20%/8.75% | £5,272 | £1,969 | ||||
| 40%/33.75% | £10,544 | £7,594 | ||||
| 45%/39.35% | £11,862 | £8,854 | ||||
| Employee NICs | ||||||
| 12% | £3,163 | |||||
| 2% | £527 | £527 | ||||
| Net income | £17,925 | £15,289 | £13,971 | £20,531 | £14,906 | £13,646 |
| Overall tax rate (%) | 40.25% | 49.04% | 53.43% | 31.56% | 50.31% | 54.51% |
19% corporation tax
If your company’s profits are less than £50,000, you pay a 19% rate of corporation tax. An Additional rate taxpayer in this situation would receive more income from dividends.
| 19% corporation tax | ||||||
| Salary | Dividends | |||||
| Basic rate | Higher rate | Additional rate | Basic rate | Higher rate | Additional rate | |
| Profit | £30,000 | £30,000 | £30,000 | £30,000 | £30,000 | £30,000 |
| Employers NICs (13.8%) | £3,639 | £3,639 | £3,639 | Nil | Nil | Nil |
| Salary | £26,361 | £26,361 | £26,361 | Nil | Nil | Nil |
| Corporation Tax | Nil | Nil | Nil | £5,700 | £5,700 | £5,700 |
| Dividend | Nil | Nil | Nil | £24,300 | £24,300 | £24,300 |
| Tax due | ||||||
| 20%/8.75% | £5,272 | £2,126 | ||||
| 40%/33.75% | £10,544 | £8,201 | ||||
| 45%/39.35% | £11,862 | £9,562 | ||||
| Employee NICs | ||||||
| 12% | £3,163 | |||||
| 2% | £527 | £527 | ||||
| Net income | £17,925 | £15,289 | £13,971 | £22,174 | £16,099 | £14,738 |
| Overall tax rate (%) | 40.25% | 49.04% | 53.43% | 26.09% | 46.34% | 50.87% |
It is often best to pay yourself a mix of salary and dividends but professional tax advisory and remuneration planning support is necessary to find the most tax-efficient balance.
Strike the balance with our specialist support
Strategic tax and remuneration planning are integral to maximising your personal income while mitigating tax, yet many owner-managers still do not have a formal remuneration strategy. This often results in tax savings and reliefs being overlooked.
Our Private Client and Tax Advisory teams at PKF Smith Cooper can work with you to create a remuneration strategy that meets both your needs and your company’s. Get in touch with us today to find out more.
