This is one of the most asked questions by Limited Company Directors. As a Director working through your own limited company, you will have the option to decide when and how to extract funds from your limited company.
There are a few different options available to you, two of which are to pay yourself a salary, take money in the form of dividends or a mixture of the two. Since these levels will depend upon your income and your circumstances, the best way will be unique to you and your company.
To help you decide the most tax efficient structure for you and your company, I’ve popped below some useful information.
What are dividends?
Dividends are an alternative way of paying yourself using the profits from your company. Limited companies can issue dividends at the end of the financial year, and at points throughout the year, which is common when the directors or shareholders rely on this for income. As long as your company is in profit, you should be able to take dividends.
How are salary and dividends taxed?
Dividends work differently than a PAYE salary because they are not liable for any National Insurance and have less Income Tax than a salary. This makes them an attractive option for limited company directors.
What is the tax allowance for dividends?
| Taxable Income | Tax Band | Tax Rate | |
| Up to £2,000 | Personal Allowance | 0% | |
| £2,000 to £37,500 | Basic Rate | 8.75% | |
| £37,501 to £150,000 | Higher Rate | 33.75% | |
| Over £150,000 | Additional Rate | 39.35% |
(correct as of 2022/23)
Salary, on the other hand, is liable for tax and National Insurance contributions, which will be taken as a proportion of your earnings.
What is the tax allowance for salary?
The tax thresholds are currently as follows:
| Taxable Income | Tax Band | Tax Rate | |
| Up to £12,570 | Personal Allowance | 0% | |
| £12,571 to £50,270 | Basic Rate | 20% of income | |
| £50,270 to £150,000 | Higher Rate | 40% of income | |
| Over £150,000 | Additional Rate | 45% of income |
(correct as of 2022/23)
Should I pay myself a salary or dividends?
Paying yourself via a salary can be a cost-effective way of drawing money out of your company, but as you pass the National Insurance threshold, your tax efficiencies may begin to decrease.
The personal allowance rate is currently £12,570 (2022/2023). The tax-free dividend allowance has remained at £2,000 since 2020 but is due to change in April 2023. The changes in allowance means that it could actually be more tax efficient to pay yourself a larger salary and reduce your level of dividends for the financial year.
Ultimately, deciding whether to pay yourself salary or dividends will depend on your circumstances, your level of income and the tax bracket you fall into.
Utilising a tax efficient structure
Though personal circumstances are different for each Director, most find that paying themselves a combination of dividends and salary is the most tax efficient an most popular way of working. This involves the Director paying themselves a salary up to the tax-free allowance and subsidising the rest of their profit via dividends.
Find out more
When it comes to getting paid, it’s not always simple to decide which route is best for you, it’s always best to seek advice.
