What's the difference between a salary and a dividend?
A salary is pay for work, like any employee's wage. Your company pays it to you, takes off your tax and National Insurance, and sends those to HMRC.
A dividend is a share of the company's leftover profit, paid to you because you own shares in the company. It's not pay for work, it's your slice of what the business made after it has covered its costs and its tax.
They feel similar (money landing in your account), but they hit the company's tax bill in opposite ways. That's the part this guide is about.
Does paying myself a salary lower my company's tax?
Yes. When your company pays you a salary, that salary is a business cost, the same as paying any other member of staff. It comes off the company's profit, and your company only pays Corporation Tax on the profit that's left. So a salary the company pays you reduces the company's tax bill.
Two things have to be true for it to count:
- It has to go through payroll. Your company registers as an employer and runs the salary through the PAYE system, taking off income tax and National Insurance and paying those to HMRC.
- The company has to really pay it. Writing a salary down on paper but never actually paying it across doesn't count, and there's a time limit on when it has to be paid. We handle that timing for you.
Does paying myself a dividend lower my company's tax?
No. This is the part people get wrong. A dividend is not a business cost. It's paid out of the profit that's left over after your company has already paid its Corporation Tax. So paying yourself a dividend does not reduce what your company owes in Corporation Tax, the tax has already been worked out before the dividend is paid.
There's a second rule that catches people: you can only pay a dividend if the company actually has the profit to cover it. That means leftover profit from this year and earlier years, after tax. If the company hasn't made enough profit, it isn't allowed to pay a dividend, and paying one anyway can land you in trouble.
To pay a dividend the proper way, you hold a quick directors' meeting to agree ("declare") it, write down a short note of that meeting, and write a dividend voucher showing the date, the company name, who's being paid and how much. Keep it for your records.
So which one should I pay myself?
Here's the honest bit: this guide is about the company's tax. The tax you pay personally is a separate matter, and it's where salary and dividends really differ for you.
A salary is taxed through income tax and National Insurance. A dividend is taxed under its own separate dividend tax rates, and the first £500 of dividends each year is tax-free. Which mix leaves you better off depends on your own total income, and there's no one answer that fits everyone.
We don't tell you a "best" split, because the right one depends on your personal situation. What we do is the company side: we work out the Corporation Tax, including the effect of the salary your company pays. For the personal mix, check it with an accountant.
A simple example
Say your company makes £50,000 of profit before it pays you anything.
- Your company pays you a £12,000 salary through payroll. That salary is a business cost, so the company's profit for tax drops by £12,000, to about £38,000. (The employer National Insurance your company pays on top of the salary is also a business cost, so the real profit charged to tax is a little lower again.) The company pays Corporation Tax on that profit, not on the full £50,000.
- After Corporation Tax, the company has some profit left. From that leftover profit, you decide to take a £10,000 dividend. The dividend comes out of money the company has already paid tax on, so it doesn't change the company's tax bill at all.
So in this example the salary lowered the company's Corporation Tax and the dividend didn't. (The tax you then pay on the £12,000 salary and the £10,000 dividend is a separate, personal calculation.)
How SimpleReturns handles it
Connect your bank or upload a statement, and we add up the year's money in and out, treat the salary your company pays as the business cost it is, and show you the Corporation Tax on the profit that's left. You see every figure before anything is sent. We do the company maths, you don't have to work any of it out.