Understanding salary and dividend payments for business owners and directors

As an owner or director, it may be possible for you to pay less tax on your income from your company through dividends.

Dividends are a portion of a company’s profits and can be paid out to directors and owners depending on the number of shares they own.

It is important to note that the business must be making a profit for dividends to be paid out, and board approval must be given for any such action.

Each year, you can earn dividends up to a certain allowance before being taxed. As of 6 April 2023, this dividend allowance is £1,000. This is in addition to the personal tax-free allowance of £12,570.

The tax rate on dividends above this allowance is lower than the tax rate on Income Tax. Below are the tax rates on dividends for each band and the corresponding Income Tax rates.

• Basic rate – 8.75 per cent (Income Tax rate – 20 per cent)
• Higher rate – 33.75 per cent (Income Tax rate – 40 per cent)
• Additional rate – 39.35 per cent (Income Tax rate – 45 per cent)

If possible, taking dividends as income means you will pay less tax, although it is important to consider the viability of such actions in terms of your company’s financial health.

As previously stated, any business not making a profit cannot pay out dividends, and any such action by an owner or director can seriously harm their business.

While paying dividends can result in less tax being paid, it is worth noting that dividends do not count towards your National Insurance Contributions (NICs).

This might have implications for certain state benefits and pensions, so it is important to consider this when deciding on a salary versus dividend mix.

If you’d like more information about dividends and would like help and advice on the subject, please contact us today.