Director Remuneration Payments: Dividends or Salary?

Blue Isometric Design

Director Remuneration Payments: Dividends or Salary?

As a director and shareholder of a limited company in the UK, deciding how to pay yourself – whether as a salary or dividends – is an important decision with implications for your tax efficiency and company cash flow.

With professional guidance on optimising director remuneration from ourselves, you can adopt strategies to minimise your tax liabilities and give yourself some leeway.

This article examines key factors to weigh up when considering dividends versus salary for limited company directors.

Tax Rates: Salary vs. Dividends

The first consideration is the different tax rates applied to both company directors’ salaries and dividends:

  • A company director’s salary is subject to income tax at a director’s marginal rate of 20%, 40% or 45%, plus Class 1 National Insurance contributions at 13.25% (over £50,270 salary).
  • Dividends are taxed at lower dividend tax rates of 8.75%, 33.75% or 39.35% depending on income level. No National Insurance is payable on dividends.

For basic rate taxpayers, dividends can provide a tax-efficient income stream compared to salary. But for higher-rate taxpayers, the differences are much less noticeable.

Therefore, it’s difficult to suggest whether you will see better financial returns if you pay yourself a salary or whether that’s achieved through dividend payments, as all circumstances are unique and different.

Company Cash Flow

Opting for dividends rather than salary, however, can directly benefit company cash flow. Other than paying employer Class 1 NICs* (13.8% on salaries greater than £12,570 per year), dividends do not incur any payroll taxes. However, companies must have sufficient retained profits to pay dividends.

In turn, exclusively paying dividends to directors allows companies to retain more vital working capital, which can be handy for companies in industries where that’s a rarity.

Compared to paying a director’s salary, along with NICs and pension contributions (more on this below), dividends may simply allow the business to retain some much-needed cash.

* National Insurance of 15.05% was for the period 6 April 2022 to 5 November 2022 since 6 November 2022 and for 2023/24 it’s 13.8% based on a salary greater than £12,570 per year, secondary threshold)

Pension Contributions

Contributing to a pension can reduce your income tax liability. However, the way pension contributions are treated differs depending on your chosen method of monthly payment:

  • Pension contributions made on salary qualify for tax relief and reduce your taxable salary.
  • There is no tax relief for pension contributions made from your dividend income.

If you want to build up your pension pot, taking more income as a salary subject to pension contributions can be more tax-efficient in the long run.

Other Financial Planning

Beyond pensions, salary payments give slightly more scope to make tax-efficient adjustments to your remuneration package, such as:

  • Making additional employee contributions to your company pension scheme through salary sacrifice
  • Salary sacrifice arrangements for childcare vouchers, cycle-to-work schemes, etc.

In summary, these adjustments allow you to reduce your taxable salary and see a slightly better net income each month.

Company Profits

The company’s profit levels must meet a minimum level to justify dividend payments to directors. Paying dividends when profits are inadequate can risk legal issues and put the company in hot water financially.

With dividends paid from profit reserves, directors should be confident about the company’s financial strength and future profit forecasts. However, this should be considered carefully before opting for dividends over salary.

Personal Circumstances

Your personal financial situation will influence how much money you take home whether you opt for salary over dividends or vice versa. The common factors that will influence your remuneration include:

  • Income type (i.e. whether you are a sole trader or company director)
  • If you are a basic, higher or additional rate taxpayer
  • If you are approaching the higher rate tax threshold
  • Your current pension position

Ultimately, strategically adjusting dividend and salary payments at the right time to stay within certain tax bands can be an effective strategy.

Get Personalised Advice from a Trusted, Experienced Accountancy Firm

Deciding whether dividends or salary suit you best involves weighing up your company’s financial position and future plans, alongside your personal tax and pension position.

At Hamlyns, our tax experts and business strategists work closely with directors to advise remuneration strategies to legitimately minimise your tax exposure. We take all relevant factors into account to recommend the optimal mix of dividends and salary tailored to your situation.

To discuss your director remuneration strategy specific to your circumstances, contact our friendly team for expert accounting advice you can rely on.

Patrick Collins
Tax Director

01483 755399

Point of Contact
Patrick Collins
Tax Director

Patrick Collins

Why Choose Hamlyns?

Personalised Service

We take a unified and unique approach to accountancy; providing an individual service to our clients

Time & Dedication

We take the time to offer proactive and innovative advice that help our clients achieve their long-term goals

Holistic Approach

Our holistic approach offers a combination of professionalism, a personal touch and attention to detail

Quality Assurance

Every one of our professional team is a member of one or more of the ICAEW or the ACCA

What Our Clients Say

Hamlyns treat me as an individual. I don’t feel like “just another client” to be processed.

Diana Boulter
MD, DBA Speakers

Chris and his team gave us precisely the advice our business needed, even before we knew we needed it!

Mike Higgins
Managing Director, Hawkmoor Limited

It’s great that I always get to speak to the same Partner who knows our situation, so I don’t need to keep repeating things.

Johnny Richards
Finance Director, Normandy Garage

When we came to Hamlyns, we were a start up business. In a few years, they’ve really helped us become a major player in our sector.

Frank Pawley MBE
Chairman, Global Travel Management Ltd

We have been working together for over 10 years and our relationship is vital to the success of our business; I would not hesitate to recommend them.

Angela Hall
Partner, Occupational Health Professionals LLP

I appreciate Hamlyns expert and informed guidance and helpful approach.

Managing Director, Arcom IT

Hamlyns took the stress away by anticipating and understanding what I needed.

Managing Director, PromoLogistics Limited

Hamlyns gave me great advice and hand-holding to ensure my exit from the company was quick and clean. I am also thousands of pounds better off. Thank you, thank you.

Douglas Cooke
Former Director