Dividends vs Salary
A director-shareholder which is what Dean and Chloe are (since they own 50:50 each of their engineering business) can vary the income they receive between dividends and salary
- Corporation Tax Liability
Salary is a deductible expense for the company. Paying a salary reduces the company’s taxable profits and therefore lowers corporation tax.
Dividends are paid out of after-tax profits. They don’t reduce corporation tax.
👉 So, choosing dividends over salary increases the company’s corporation tax bill (because profits stay higher).
- Dividend Tax
The director personally avoids NICs on dividends, but instead pays dividend income tax:
8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate) after the £1,000 dividend allowance (2023/24).
👉 The balance between NICs saved and dividend tax paid has to be considered.
- Pension Contributions
Salary counts as “relevant UK earnings” for pension contribution purposes. This allows the director to make personal pension contributions (up to 100% of earnings, capped by the annual allowance).
Dividends do not count as relevant earnings. So if a director pays themselves mostly via dividends, their personal pension contributions may be restricted.
👉 They could still contribute via the company (employer pension contributions are deductible for corporation tax), but that’s a different planning route.
- Share Valuation
Dividends affect the value of shares in the company, since they represent a return on ownership. If a company pays large dividends, this can influence how shares are valued for:
Inheritance tax planning (transfers of shares)
Capital gains tax (on disposal of shares)
Business sales or succession planning
👉 Regular high dividends may push up the perceived market value of shares compared to a company that retains profits.
