Salary vs Dividends – When Should You Consider Each Option for Profits Over £100K?
- Silvia Merchant
- Sep 12, 2024
- 2 min read
As a business owner, one of the key financial decisions you’ll make is how to take money out of your company. Should you pay yourself a salary, take dividends, or perhaps a combination of both? The answer largely depends on your company’s profits and the tax implications of each option.
Understanding Salary vs Dividends
Salary:
A salary is considered an allowable business expense, which reduces your company’s taxable profit.
However, both income tax and National Insurance Contributions (NICs) apply to salary. Employer NICs at 13.8% are also a factor to consider.
Salaries ensure consistent income but come with a higher tax burden.
Dividends:
Dividends are distributions of after-tax profits. You can only pay dividends if your company has distributable profits.
They are taxed at lower rates than salary and are not subject to NICs. However, Corporation Tax (19% for profits below £250,000, and 26.5% for profits above that) has already been applied to the company’s profits before dividends are paid.
Analysis of the £100,000 Profit Scenario
Let’s look at the table you provided to compare the impact of taking income as a salary/bonus vs. dividends when the business has £100,000 in profits.
Company position (19%/26.5% corporation tax) | Payroll | Dividend |
Profits | £100,000 | £100,000 |
Salary/bonus | £88,977 | £9,100 |
Employers NICs (13.8%) | £11,023 | £0 |
Less: total payroll cost | (£100,000) | (£9,100) |
Taxable profits | £0 | £90,900 |
Less: corporation tax | £0 | (£20,339) |
Profit after tax | £0 | £70,562 |
Less: dividend | £0 | (£70,562) |
Retained profit | £0 | £0 |
If you take additional salary:
Salary/Bonus: £88,977, with an additional £11,023 paid as Employer’s NICs.
Since the total payroll cost equals £100,000, there are no taxable profits, meaning no Corporation Tax applies.
However, the individual will face Income Tax (up to 45% if you’re a higher earner) and National Insurance Contributions (NICs), reducing the final take-home pay.
If you take dividends:
With a minimal salary of £9,100 (within the tax-free personal allowance), the remaining £90,900 is taxed as profits. Corporation Tax is applied at the appropriate rate (likely 19% for most small to medium businesses).
After Corporation Tax (£20,339), the remaining profit of £70,562 is available as a dividend. Dividends are taxed at 7.5% (basic rate), 32.5% (higher rate), or 38.1% (additional rate) depending on the individual’s total income.
The Benefits of Dividends Over Salary
In this example, taking a dividend clearly results in a higher net income compared to taking the full amount as salary. The dividend route results in a net receipt of £66,487, compared to £62,164 if taken as salary. Dividends tend to be more tax-efficient because they aren’t subject to NICs, and the dividend tax rates are lower than Income Tax rates.
For businesses with profits exceeding £100,000, understanding the tipping point between the tax efficiency of dividends and salary becomes crucial. In fact, a combination of minimum salary plus dividends is more efficient until the extracted amount exceeds approximately £411,000. Beyond that point, taking salary becomes more tax-efficient.