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Salary vs dividends: Taking income from your company

Updated 05 May 2022

5min read

Nick Green
Financial Journalist

Which is better - salary or dividends?

What’s the most tax-efficient way for company directors to take income? If you run a company (even if it's a one-person contractor company) here are the three different ways that you can choose to pay yourself: salary, dividends and pension contributions. In particular, we’ll look at the tax advantages of dividends and pension contributions, along with the limitations of these forms of remuneration.

  1. How should I take an income from my company?
  2. Taking a salary from your company
  3. Taking dividends as income
  4. Receiving pension contributions directly from your company

How should I take an income from my company?

Most directors of limited companies pay themselves in some combination of salary and dividends, often supplemented by pension contributions from the company. Finding the right combination for you will depend on a number of factors, such as

Taking a salary from your company

As a director, it’s a good idea to take at least a small salary. This mean putting yourself on your company’s payroll. There are several benefits of taking part of your income as salary.

The benefits of taking a salary

  • You build up qualifying years towards your state pension
  • You can make higher personal pension contributions
  • You can retain maternity benefits
  • It can be easier to apply for things like mortgages and insurance policies such as critical illness cover
  • You reduce the amount of corporation tax that your company pays (as salary is an allowable business expense)
  • You can take a salary even if your business makes no profit

There are however several drawbacks to taking a salary, particularly a large one.

The drawbacks of taking a salary

  • Taking a salary means that both you and the company have to pay National Insurance contributions (NICs)
  • A salary also attracts higher rates of income tax than a dividend does

Deciding how much salary to take

You don’t pay income tax on your earnings until pass the personal allowance (currently £12,500 in the 2019/20 tax year). However, you will have to pay NICs if your income passes the NIC Primary Threshold (currently £8,632).

Note that in order to build up qualifying years for the state pension, your salary must be at or over the NIC Lower Earnings Limit (currently £6,136). Some directors therefore set their salaries between the Lower Earnings Limit and the Primary Threshold, so as to keep their state pension but avoid paying NICs.

Taking dividends as income

Many directors choose to take the majority of their income in the form of dividends, as this is usually more tax-efficient.

What are dividends?

A dividend is simply a share of the company’s profits. Profit is what is left over after the company has settled all its liabilities, including taxes. If there is no profit, then no dividends can be paid.

Dividends can be paid to directors and other shareholders, according to the proportion of shares that they hold. There is no requirement to pay all the profits as dividends, or even any of them. A company can retain profits over a number of years and distribute them as the board decides.

The benefits of taking dividends

  • Dividends attract lower rates of income tax than salary
  • No NICs are payable on dividends (neither employer’s nor employee’s)

By taking most of your income in the form of dividends, you can significantly reduce your income tax bill.

Your dividend allowance

You have a tax-free dividend allowance, which is in addition to your personal allowance. In the 2019/20 tax year this allowance is £2,000. This means that you can earn up to £14,500 before paying any income tax at all.

Income tax rates on dividends

Dividends attract a much lower rate of income tax than salary does. There is also a slightly greater tax-free allowance when you are paid in dividends. Here is a comparison table:


Basic rate

Higher rate

Additional rate





Tax threshold:


£50,001 to £150,000






Tax threshold:


£50,001 to £150,000



Jane takes a salary of £8,600 (keeping below the threshold for paying NICs or income tax on it) and takes a further £30,000 in the form of a dividend. Her total income is now £38,600. She has a tax-free personal allowance of £12,500 in 2019/20, leaving £26,100. Her dividend allowance means the first £2,000 of dividends are tax-free, leaving £24,100 that is taxable.

This £24,100 is taxed at the dividend basic rate of income tax, which is just 7.5 per cent. So Jane’s income tax bill for the year will be £1,807.

If Jane had taken the whole £38,600 as salary, then her income tax bill would have been 20 per cent of £26,100 – which is £5,220. She would also have to pay £3,596 in NICs.

By taking her income in a combination of a low salary plus dividends, Jane has saved over £7,000 in that year.

Also note that the company would have to pay employer NICs on her salary, coming in at £4,135. However, this will be offset to some extent by lower corporation tax.

The drawbacks of taking dividends

Although taking your income mostly in the form of dividends may seem like a no-brainer, there are certain limitations and pitfalls to watch out for.

  • Dividends can only be paid out of profits
  • Relying too much on dividends can make your income unpredictable
  • Dividends are paid after corporation tax has been deducted (unlike salary, which is a tax deductible expense)
  • If you accidentally take a dividend that is not covered by profits, you will have taken out a director’s loan which must be repaid
  • Dividends don’t count as ‘relevant UK earnings’ for the purposes of tax relief on pension contributions that you make yourself (see below)

If you plan to rely on dividends for some or most of your income, then ensure you have a rigorous accounting function in place to declare profits and account for dividends in good time. Your accountant can also help you work out which method of payment is most tax-efficient for both yourself and your company – as this can be quite convoluted.

Receiving pension contributions directly from your company

A third possible way to receive tax-efficient remuneration is in the form of pension contributions directly from your company. This is different from contributing to your pension yourself, as it counts as an employer pension contribution.

The benefits of taking employer pension contributions

  • Pension contributions don’t add to your income, so don’t increase your tax bill
  • They are an allowable business expense, saving up to 19 per cent in corporation tax bill
  • There are no employer NICs to pay, saving another 13.8 per cent
  • Employer pension contributions are not limited by the size of your salary

The last point above is an important one. As an individual, you are not allowed to pay more into a pension in a year than your salary for that year. Therefore, if you are taking a small salary plus dividends (as discussed above) then you can’t pay very much into your pension.

However, employer pension contributions are not limited in this way. They are limited only by the annual allowance (currently £40,000). So your company can contribute up to this amount into your pension, even if you are on a small salary.

The drawbacks of taking employer pension contributions

The main downside of taking remuneration in the form of pension contributions is the obvious one: you can’t access your pension until at least the age of 55. Therefore pension contributions can’t be a substitute for salary or dividends, just a welcome addition to them.

Talk to your accountant about the most tax-efficient ways for you to pay yourself from your company.

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About the author
Nick Green is a financial journalist writing for Unbiased.co.uk, the site that has helped over 10 million people find financial, business and legal advice. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.