Salary / Dividends

What is the optimum mix of salary and dividends you should draw down from your limited company in order to minimise your tax liabilities?

As a limited company director, you have a great deal of flexibility over the way you remunerate yourself. Company owners can draw down income from your company in the form of a salary, and dividends.

Traditional employees are paid salaries, upon which income tax and National Insurance Contributions are payable.

Company owners, on the other hand, can elect to draw down small salaries, and take most of their income in the form of dividends. No National Insurance Contributions are payable on dividends, so the savings can be considerable.


The majority of limited companies pay themselves a small salary. This will often be below the prevailing personal allowance (£11,500 during the 2017/18 tax year, £11,000 during 2016/17) and National Insurance thresholds, so no tax or NICs are payable at all. You (or your accountant) may prefer to pay minimal NICs or a small level of income tax on the salary – but this is very much up to you. You should certainly seek the advice of your accountant when setting your salary level.

There are a few factors you should consider when setting your salary level.

  • How much salary have you already received in the current tax year from previous employment?
  • If you have a contract of employment with your company (however unlikely this may be), you must pay yourself no less than the prevailing National Minimum Wage.
  • You may need to pay yourself above a certain threshold to ensure you have a National Insurance record for the tax year in question, and that your entitlement to the state pension is unaffected.
  • If your salary is higher than the minimum National Insurance threshold, then you must pay Employees’ NICs on this income, and the company must pay Employers’ NICs on all income above the threshold.

'Tax on dividends' sign


The remainder of your contracting income will be drawn down as dividends.

Dividend tax is paid to HMRC via the annual self-assessment process, and the amount you pay will depend upon the taxable band you fall into.

From 6th April 2016, the entire dividend taxation system was reformed. The antiquated tax credit system was abolished, and replaced by the following tax rates: Basic (7.5%), Higher (32.5%), Additional (38.1%). Most contractors will pay more tax overall as a result of these changes.

In fact, a contractor on around £350 per day will pay £4,000 more in dividend tax per year following the overhaul of the taxation system.

You also have flexibility over the timing of dividend declarations. You may decide to hold off drawing down dividends until the following tax year, if you wish to avoid paying higher rate tax, for example.

If you are married, you may also benefit from splitting company shares with your spouse – especially if they do not already have another source of income. The spouse can receive dividend income up to the higher rate tax threshold without having to pay any tax at all.

For obvious reasons, you should discuss any questions relating to remuneration with your accountant, and do not rely solely on information contained on this site.

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