Business owners of limited companies can maximise their earnings post-tax by paying themselves a low salary along with the balance in dividends from their company’s profits. However, from April of this year, the 10% dividend tax credit was abolished and replaced with a new dividend tax allowance of £5,000 per year.

This allowance does not reduce total income for tax purposes and will only apply to dividend income. Dividend income exceeding the £5,000 allowance and the personal allowance for income tax will be taxed at the following rates:

• basic rate taxpayers: 7.5%
• higher rate: 32.5%
• additional rate: 38.1%.

Despite these April 2016 dividend tax changes, getting cash from a company through a dividend payment is still more tax-efficient than paying yourself a salary as a business owner. This is partly down to the fact that dividends aren’t subject to National Insurance Contributions (NICs). However, the changes mean that incorporation may not be as attractive for small business owners as it once was. But it is important to remember that dividends paid within pensions funds and those received in shares from ISAs will stay tax-free, and the £1,000 savings allowance (£500 for higher rate taxpayers) excludes dividend income.

Yet there are benefits to paying yourself a salary rather than via a dividend payment. For example, dividends must be paid out of profits whereas salaries don’t. This means you can continue to draw a salary if you are making a loss, but you won’t be able to receive a dividend. Salaries are staggered over the year whereas dividends are one-off payments, so you must plan the timing of any dividends so that they won’t negatively impact your cash flow. Finally, corporation tax at 20% is due on profits after costs, including salaries, have been deducted. Paying a salary reduces profit and therefore reduces the corporation tax bill.

For more information about the most tax-efficient way to pay yourself, call us on 01623 490120 or email at This email address is being protected from spambots. You need JavaScript enabled to view it..