Small Business Tax Advice: Dividends Or Salary – Which Is Better?

Which is better for small business owners: dividends or salary payments?

That’s a question we’re often asked at Steven Glicher accountants. The answer we generally give to our clients is actually a mixture of the two is probably best, but it all depends on the individual circumstances of the clients.

Operating a business through a limited company can bring advantages, particularly in relation to reducing your overall tax bill.

However, business owners need to think long and hard about their remuneration packages and to be fully aware of the tax implications of any decision they make. Hopefully you will find the following information on dividends and salary payments useful in helping you to reach a decision that best suits you.


If you are looking to pay a salary to anyone over and above the Lower Earnings Limit (currently £109 per week), any company will need to register as an employer. This means they will have to report to HM Revenue & Customs (HMRC) when staff are paid and undertake payroll calculations. From April 2013, RTI changes mean that employers must report online to HMRC on or before payments are made to employees and directors. Even if no payments are made, there remains a reporting requirement, although there are annual scheme options which can reduce the frequency of reporting.

Salary is subject to income tax and National Insurance; both employees’ and employers’. But salaries, bonuses and employers’ National Insurance should be tax deductible expenses for the company and increase the amount of contributions that can be paid into a personal pension.

If you have no other income subject to National Insurance, paying a salary of at least the Lower Earnings Limited, (currently £109 per week) will ensure that your entitlement to state benefits is preserved and may not trigger any tax or National Insurance whatsoever depending on your circumstances.


Dividends are payable out of post-corporation tax profits. The levels and timings of dividends are set by the directors and are paid to shareholders according to the number of shares they hold. Shareholders need not be directors, nor do directors necessarily need to be shareholders. Dividends should be documented by way of a dividend voucher and board minute.

Dividends can be advantageous because the income tax rates applicable are lower than normal income tax rates and they also not subject to National insurance. What’s more, they are deemed to have been paid net of a 10% notional tax credit, which can help to reduce your income tax liability.

Combining dividends and salary payments.

There are numerous factors that should be taken into account when deciding how to extract profits from the business: some will work well for some businesses, some will be better for others. Most accountants would advise that a mixture of salary payments and dividends is probably the most tax efficient and appropriate course of action. However, extraction of profits is a complex area so if you are in any doubt about what you should do for the best, then you should seek professional advice from an experienced company like Steven Glicher accountants.

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