Should I take a salary or dividends as a small business owner?

If you own a small business and are also a shareholder director, you may be wondering whether to take a salary or dividends. When it comes to paying yourself, there are both advantages and disadvantages to each option. We’ll discuss the when, why, and how of taking salaries versus dividends for shareholder directors of small businesses in the UK.

When can you take a salary?

The UK tax system allows company shareholders to draw money from their companies in two ways – either by taking a salary (which is then subject to Income Tax and National Insurance Contributions) or by taking dividends (which is not subject to NICs). As long as your company has made enough profit that year, you can draw any amount of salary or dividends.

Why you should still take a salary

If you are planning on drawing money from your business but intend on maintaining contributions towards state pensions and other benefits such as maternity leave and job seekers’ allowance down the line, then it makes sense for you to take salary instead of dividends. Taking at least £11,908 per annum (the Primary Threshold for Directors) as salary will ensure that your contributions stay up-to-date and that you’re entitled to certain benefits later on in life.

When can you take dividends in the UK?

If your company has made enough profits that year, you can take any amount of dividend payment without having to pay any NICs. However, if your annual dividend payments exceed £2,000 per year (based on the current dividend allowance), then you will need to pay some tax on those payments.

With effect from April 2023, dividend tax rates have been reduced to £1,000 and will be halved again to just £500 in the next tax year.

How dividends can save you tax

Dividends are taxed at significantly lower rates than salaries. For 2022/23 and into the new tax year, they are:

  • Basic rate: 8.75 per cent
  • Higher rate: 33.75 per cent
  • Additional rate: 39.35 per cent

Moreover, and as mentioned above, they do not attract NICs for either you or the business.

How to balance dividends and salary

It’s important to consider both options carefully before deciding which one works best for you based on your current financial situation and future plans. Usually, people do some combination of both – they take some amount as a salary every month (enough to cover their basic expenses) while also taking additional funds out of their business via dividends when needed throughout the year.

This approach helps them maintain their national insurance contributions while still making sure they’re getting enough funds out of their business each month/year while avoiding high taxes on larger sums taken out all at once via dividend payments.

Taking salary or dividend payments from your small business is, of course, necessary in order to make a living from it.

It’s important to weigh all these factors carefully before deciding how much should come out of your business each month/year via salaries vs dividend payments in order for you get the most from your business without sacrificing important benefits such as National Insurance contributions down the line.

Posted in Business.