Salary vs Dividends

For owner managed limited companies, the big decision has always been how to extract profits from the Company in the most tax efficient way.

Up until the budget today, dividends have been marginally more tax efficient.

Tax Implications of taking a Dividend

DIVIDENDS ARE NOT AN ALLOWABLE EXPENSE AND THEREFORE DO NOT REDUCE CORPORATION TAX FOR THE BUSINESS.

Pre budget 2025

There is no National Insurance (NI), just dividend tax of 8.75%. 33.75% or 39.35% – depending on the rest of the individual’s income.

Tax Implications of taking a Salary

SALARIES ARE AN ELIGIBLE EXPENSE, REDUCING THE BUSINESS PROFITS RESULTING IN LOWER CORPORATION TAX.

INCOME TAX: Above the personal threshold of £12,570 salary is taxed at 20%, 40% or 45%.

EMPLOYEE NATIONAL INSURANCE CONTRIBUTIONS: Above the primary threshold of £12,570 is charged at 8%.

EMPLOYER NATIONAL INSURANCE CONTRIBUTIONS (ERNIC): 15% ERNIC is charged on each individual above the £5,000 threshold. If there is more than one employee, the first £10,500 of ERNIC is covered by the Employment Allowance.

Post Budget 2025

Dividend Tax is to be increased by 2% – 10.75%, 35.75% and 41.35%

DIVIDENDS VS SALARY is now a different conversation!

Example

Prior to Budget

Assuming individual tax allowances have been fully used and ignoring ERNIC

An additional £10,000 dividends would incur Dividend Tax of  £875

An increased salary of £10,000 would cost income tax of 20%  £2000

Plus, Employee National Insurance at 8%  £800

However, as an eligible expense this would save 19% Corporation Tax  £1,900

Overall tax burden of increase to salary £900

AFTER BUDGET

10,000 dividends would incur £1,075 of dividend tax

£175 more than tax from salary.

Tax savings from taking a salary are much larger if you pay 25% Corporation Tax.

To keep it simple, we have ignored ERNIC. But if you are a sole employee and the business owner then 15% ERNIC would be payable – £1500 – keeping dividends still the most tax efficient way to extract profits from your company.

And don’t forget:

Dividends can ONLY be paid out of profit, whereas a salary can be paid regardless of the financial position of the company (subject to cashflow).

Every business and business owner has a different set of circumstances and priorities, so get the advice to see what works best for your company.