The Ideal Salary and Dividend Strategy
If you’re a company director and shareholder, planning how you pay yourself through salary and dividends is an important step. Many directors overlook this, missing opportunities to structure their income in a way that is tax-efficient. We often hear the question: What is the ideal salary and dividend strategy?
With the new tax year already underway, now is the perfect time to review your options.
A premier accountant can, and should, implement great tax strategy for you.
Key Terms
Salary
Paid through your company payroll.
Counts as a business expense.
Triggers Employers’ National Insurance Contributions (NIC) if it goes above the secondary threshold of £5,000.
Some companies can claim relief on this cost, but not all are eligible.
Dividends
Paid out of your company’s post-tax profits or retained earnings.
Can be distributed at any point in the financial year or after the year-end accounts are reviewed.
Example in Practice
A dividend top up can be more tax-efficient than a full salary because they are not subject to NIC. On top of that, each taxpayer gets an annual £500 dividend allowance.
With careful planning, you could receive a take-home income of £45,879 from a combined package of £50,270. Here’s how:
Salary: £12,570 (£1,047.50 per month)
Covered by your personal allowance (no income tax).
Within the NIC threshold for employees.
Subject to Employers’ NIC of £1,136.
Dividends: £37,700
First £500 is tax-free.
Remaining £37,200 taxed at 8.75% = £3,255.
Total tax/NIC paid: £4,391.
Net income: £45,879.
Why Planning is Imperative
The way you pay yourself affects more than just your immediate take-home pay:
State Pension: This setup gives you a qualifying year of NIC contributions, helping maximise your pension in retirement.
Child Benefit: Keeping income below £60,000 ensures full entitlement.
Avoiding Higher Tax Rates: Capping income at £50,270 prevents dividend tax from jumping to 33.75%.
Employment Allowance: Sole director companies can’t claim this. But adding another employee - even part-time - could change eligibility
Bonus Tips
Use Pension Contributions – Company pension contributions are tax-deductible and reduce Corporation Tax.
Plan with Spouses/Partners – If your spouse is a shareholder, splitting dividends can double allowances.
Watch the £500 Dividend Allowance – It’s much lower than in previous years, so plan ahead.
Consider Timing – Dividends can be delayed to the next tax year if nearing a threshold.
What’s Right for You?
Every business owner’s situation is different. This example works for many directors, but your income mix, family circumstances, and long-term plans all play a part in finding the best strategy.
To review your options, contact Shaw & Co today on 01603 975976. We are happy to help.