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This is a question we often get asked. And to be honest, quite understandably too as it is one question that causes a lot of confusion for small business owners who trade through a limited company.


What are dividends?

Dividends are an alternative way of paying yourself using the profits from your company. Limited companies can issue dividends at the end of the financial year (final dividends), and at points throughout the year (interim dividends), which is common when the directors or shareholders rely on this for income.

As long as your company is making a profit, or has reserves from previous years, you should be able to draw dividends to top up your monthly salary. Your company does not need to pay tax on dividend payments, but shareholders may have to pay Income Tax if they’re over £2,000. However, you cannot count dividends as business costs when you work out your Corporation Tax.

Dividends work differently than a PAYE (Pay As You Earn) salary because they are not liable for any National Insurance and you pay less Income Tax than a salary.

So despite paying corporation tax (currently 19%) this makes them a very attractive option for many directors. As an employee taking a salary, you are liable for tax and National Insurance contributions, which will be taken as a proportion of your earnings.


Tax on Dividends (above your allowance)

The tax you pay depends on which Income Tax band you’re in.

Tax On Dividends
Dividend allowance £2000 0%
Basic rate £12,500 0%
Basic rate £37,500 7.5%
Higher rate £150,000 32.5%
Additional rate Above £150,000 38.1%

To find out your tax due, add together your income from dividends to your other taxable income to work out your tax band.

The personal allowance rate for salary rose from £11,850 to £12,500 in April 2019 and the dividend allowance remained at £2,000.

These changes mean that it could be more beneficial to pay yourself a slightly larger salary and reduce your level of dividends.



For this example, we compare the income after taxes for three scenarios, all of whom have earned £80,000 in gross contracting fee income.
  1. is paying themselves via a salary
  2. has taken an £8,632 salary (2019/20 NiC Primary Threshold) and is taking the rest in dividends, and
  3. is splitting the income via salary and dividends between two equal shareholders
1 2 3
A Gross income 80,000 80,000 80,000
B [A-D] Salary 70,299 8,632 17,264
C [A-B] Gross profit before tax n/a 71,368 62,736
D Employers NIC 8,510 n/a n/a
E Employees NIC 5,373 n/a n/a
F PAYE 15,620 0 0
G Corporation Tax n/a 13,560 11,920
H [D+E+F+G] Tax Sub Total 29,502 13,560 11,920
I [A-H] Net profit, therefore dividends payable 50,498 66,440 68,080
J Tax on dividends n/a 10,311 8,937
K [I-J] Income After Tax 50,498 56,129 59,143


If you would like us to calculate which formula of salary v dividends is better for you, please contact us at [email protected] but please remember….


Focus on your business and making as much money as possible – tax is a consequence of being profitable and shows you and your stakeholders that the business is doing well.