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Starting A Business

Salary Vs

As a Company Director should you pay yourself by salary or dividends? Discover the most tax efficient way to pay yourself.


As a director of a limited company, you have flexibility over how you are remunerated.

The options you choose will depend on what is most tax efficient for your business and your financial commitments. The main choices for remuneration are salary, dividends, and pension contributions – most directors choose a combination of all three options.

What is the best way to pay yourself?

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Are you eligible to take dividends?

If you are a company director outside of IR35, you are entitled to take dividends. However, many contractors have IR35 status, so it is advisable to ensure that you check with an accountant before you take any dividends.

What are dividends?

A dividend is the share of a company's profits distributed to shareholders, as determined by the company's board of directors. Profit is determined as what is left over after the company has settled all its liabilities, including taxes. The business must be making a profit (after tax) in order to pay dividends. If no profit has been made in a financial year, then no dividends can be paid in that financial year.

Dividends may be paid out as cash or in the form of additional stock. Often companies will not pay dividends and instead retain earnings to be invested back into the company. A company can choose to retain profits to aid cash flow and distribute them at a later date. The amount a shareholder or director receives will receive will depend on the proportion (and often class) of the shares that they hold.

Dividend allowance

In the UK, a dividend allowance is available, which is the amount you can earn tax free from dividends. The dividend allowance is in addition to your personal allowance.


In the 2022/23 tax year the tax-free personal allowance remains unchanged at £12,570 and the tax-free dividend allowance remains at £2,000. If your dividend payments are more than your combined Personal Allowance and your Dividend Allowance, you'll only pay tax on the part of your earnings above the thresholds.

Is salary the same as dividends?

Dividends can only be paid if a company has made a profit. If you take out a dividend that cannot be covered by your business's profits, it has to be recorded as a director's loan. A salary is a fixed, regular payment, usually monthly or weekly, that is paid irrespective of whether or not a profit has been made.


How should I pay myself?

There are advantages and disadvantages of salary, dividends, and pension contributions, along with limitations. The majority of company directors pay themselves in a combination of salary and dividends, which can also be supplemented by pension contributions. Choosing the right combination of remuneration will depend on a number of factors, such as your company’s’ profits, how much you wish to reduce your personal and company tax bill and whether you want to retain benefits such as maternity benefits or state pension.

At Styles & Associates Accountancy we will advise you on the most tax-efficient ways for you to pay yourself from your company.



Advantages of taking a salary 

  • A salary can be taken even if your business doesn’t make a profit 

  • You build up qualifying years towards your state pension 

  • You can make higher personal pension contributions 

  • You can reduce the amount of Corporation Tax that your limited company will pay, as salary is classed as an allowable business expense 

  • You can retain maternity benefits 

  • It can be easier to apply for mortgages, loans, and insurance policies such as critical illness cover

Limitations of salary 

  • A salary attracts a higher rate of income tax than dividends 

  • Both you and the company may be required to pay National Insurance Contributions (NICs) 



For most Company Directors, dividends are often the most tax-efficient way to take the majority of their income. 

Advantages of dividends 

  • Dividends attract lower rates of income tax than salary 

  • National Insurance Contributions are not payable on dividends  

  • You can reduce your personal Income Tax bill by taking some of your income as dividends 

  • You have a tax-free dividend allowance which is in addition to your personal allowance 

Limitations of dividends 

  • Dividends can only be paid if a company has made a profit 

  • Dividends alone can make your income unpredictable 

  • An unpredictable income will limit your options when applying for a mortgage or loan 

  • Unlike salary, dividends are not a tax allowable expense  

  • Dividends taken that are not covered by profits, must be repaid as a ‘Directors Loan’. 

  • Unlike salary, dividends do not offer tax relief on personal pension contributions. 

  • Dividends as your only source of remuneration will reduce your entitlement to certain benefits such as maternity pay. 


Pension Contributions

Pension schemes must be registered with HMRC to qualify for tax relief. You will not pay tax on pension for contributions of up to 100% of your earnings in a year (to a maximum of £40,000). 

Advantages of pension contributions 

  • Pensions are not classed as income so do not increase your tax bill 

  • Pensions are an allowable business expense, as such can reduce your corporation tax bill 

  • National Insurance Contributions are not payable on pension contributions. 

  • Employer pension contributions are not limited by the size of your salary 


Limitations of pension contributions 

  • In order to build up qualifying years for a state pension, you can’t access your pension until at least the age of 55.  


How are salary and dividends taxed (2022/23 tax year)? 

Should I pay myself a salary or dividends?

Most limited company directors find that paying themselves a salary up to the personal allowance limit, with additional payments made via dividends is the most tax-efficient method of remuneration. There is no minimum wage threshold for directors – you can pay yourself as much or as little as you decide.


If you are a director of a company, our team can help advise on the most tax efficient way to pay yourself.  The balance between salary, dividends and pension contributions will depend on your circumstances, the tax bracket you fall into, and your income.  Call us today on 01420 541 554 for a free consultation. 


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