Dividend vs Salary Calculator | Most Tax Efficient Director Pay

The most tax-efficient salary depends on whether you can claim Employment Allowance. If you're the only employee/director and cannot claim it, the optimal salary is £9,100 (just below the NI threshold), saving employer NI. If you have other employees or are eligible for Employment Allowance which covers £5,000 of employer NI, then £12,570 (the full Personal Allowance) is optimal. Take the remainder as dividends for lower overall tax. The £9,100 threshold avoids the 15% employer NI charge while still providing qualifying years for State Pension.

You should use a combination of both. Pay yourself a small salary (£9,100 or £12,570 depending on Employment Allowance eligibility) to use your Personal Allowance and maintain NI credits for State Pension, then take the remainder as dividends which are taxed more efficiently. Dividends attract 8.75% tax in the basic rate band compared to 20% Income Tax plus 8% employee NI plus 15% employer NI on salary. This combined approach typically saves £2,000-£5,000 annually compared to taking all salary. Never take all dividends as you'll waste your Personal Allowance and lose NI credits.

Dividends are taxed at 8.75% for basic rate taxpayers (total income up to £50,270), 33.75% for higher rate taxpayers (£50,271-£125,140), and 39.35% for additional rate taxpayers (over £125,140). You also receive a £500 dividend allowance which is tax-free regardless of your tax band. Dividends do not attract National Insurance contributions (neither employee nor employer), making them significantly more tax-efficient than salary for amounts above your Personal Allowance. However, dividends are not Corporation Tax deductible, whereas salary is, so there's a balance to strike in the optimal strategy.

Employment Allowance reduces your employer NI bill by up to £5,000 per year. However, you cannot claim it if you're a one-person company where the sole employee is also a director. If you employ other staff or have multiple directors/employees on payroll, you can claim it by ticking the box when setting up PAYE with HMRC. This dramatically changes your optimal salary strategy - with Employment Allowance, taking £12,570 salary is optimal as the £521 employer NI is covered by the allowance. Without it, £9,100 salary is better to avoid all employer NI. Check your eligibility carefully as this single factor can swing your optimal salary by £3,470.

No. Dividends can only be paid from "distributable profits" - accumulated retained profits after tax. If your company made a loss this year, you can only pay dividends if you have sufficient retained profits from previous profitable years. Paying dividends without adequate retained profits makes them "illegal distributions" which are personally repayable to the company and can result in director disqualification. Always check your company's retained profits position on the balance sheet before declaring dividends. If insufficient profits exist, extract funds via salary or director's loan account instead, though the latter has its own tax implications if not managed carefully.

No, dividends themselves are not reported to Companies House. However, you must maintain proper internal documentation: board minutes declaring the dividend (dated before payment), dividend vouchers issued to each shareholder, and accounting records showing the payment. These must be kept for 7 years and produced if HMRC investigates. The dividend will appear in your annual accounts filed at Companies House as a reduction in retained profits, but the specific dividend declarations are not separately filed. Failure to maintain proper dividend documentation can result in HMRC reclassifying the payments as salary, triggering backdated PAYE, NI, interest, and penalties.

You can pay dividends as frequently as you like - monthly, quarterly, or annually - provided you have sufficient distributable profits at each declaration date. Many directors take monthly dividends alongside their salary for regular income. However, each dividend payment requires proper documentation (board minutes and dividend vouchers dated before payment). Some directors prefer quarterly or annual dividends to reduce administrative burden. Timing can be strategically important - if you're near a tax band threshold, splitting dividends across tax years can save thousands by keeping you in the lower band. Our clients typically take regular monthly dividends for living expenses, then a larger dividend near year-end once final profit is known, optimizing across the April 5th tax year boundary where beneficial.

Possibly, but it's usually not necessary or optimal. Most mortgage lenders accept director dividends as income when assessing affordability - they typically average your last 2-3 years of salary plus dividends (after tax). Some lenders are more dividend-friendly than others. Temporarily increasing salary for a mortgage application is inefficient as you'll pay more tax and NI on the higher salary, and lenders will want to see sustained income history anyway. Instead, work with a mortgage broker experienced with limited company directors who knows which lenders accept dividend income readily. We provide clients with accountant-certified income confirmation letters (salary + dividends) which most lenders accept. Only consider increasing salary if your accountant confirms it's genuinely required by your specific lender and the tax cost is justified by the mortgage benefit.

If you declare dividends exceeding your company's retained profits, they become "illegal distributions." The excess is not treated as a dividend for tax purposes and must be repaid to the company. If not repaid, it's reclassified as a director's loan account balance, potentially triggering Corporation Tax charges on the company (32.5% of the loan) and benefit-in-kind charges on you personally. In serious cases involving large illegal distributions, directors can face disqualification proceedings. This is why it's crucial to review your company's financial position before declaring dividends. Your accountant should confirm available distributable profits before any significant dividend is declared. If you've taken excessive dividends, address it immediately - either by repaying the company or by declaring additional salary to cover the excess (though this triggers retrospective PAYE/NI issues). Prevention through proper accounting is far better than correction.

Yes, if your spouse owns shares in the company. Dividends are paid based on shareholding, not work performed. This is a legitimate tax planning strategy called "income splitting" - if your spouse is a basic rate taxpayer or non-earner while you're higher rate, shifting some dividend income to them can save significant tax (8.75% vs 33.75% on dividends). However, HMRC applies "settlements legislation" to prevent artificial arrangements - the shareholding must be genuine (properly documented share issuance, shares paid for at proper value) and dividends must be proportionate to share classes. Simply giving your spouse shares and paying them disproportionate dividends will be challenged by HMRC. For this to work properly, involve your accountant in setting up the share structure correctly from the start, with proper documentation proving the shareholding is real, not a paper arrangement designed purely for tax avoidance.

No, if you take zero salary you don't need to register for PAYE or run payroll. However, this is almost never optimal. Taking zero salary wastes your Personal Allowance (£12,570 of tax-free income) and means you don't earn qualifying years for State Pension (you need salary of at least £6,725 for full NI credits). The optimal strategy is to take a small salary (£9,100 or £12,570) which requires PAYE registration and monthly/annual payroll processing, then take the rest as dividends. Yes, payroll adds administrative burden, but the tax savings are substantial - typically £1,500-£2,000 annually just from utilizing your Personal Allowance, plus securing your State Pension qualifying year. If managing payroll seems complex, this is exactly what our £150/month package handles - we run your payroll, process RTI submissions to HMRC, issue payslips and P60s, and optimize your salary level annually.

LOYALS serves company directors across all London boroughs from our King's Cross office. We work with clients in Westminster, Camden, Islington, City of London, Hackney, Tower Hamlets, Southwark, Lambeth, Wandsworth, Hammersmith and Fulham, Kensington and Chelsea, Greenwich, Lewisham, Newham, Barking and Dagenham, Redbridge, Havering, Bexley, Bromley, Croydon, Sutton, Merton, Kingston, Richmond, Hounslow, Ealing, Brent, Harrow, Hillingdon, Barnet, Enfield, Waltham Forest, and all surrounding areas. We use cloud accounting software so your location doesn't matter - everything is handled digitally with secure document exchange. We're available for in-person meetings at our King's Cross office when needed, and our extended hours (Mon-Fri 9am-6pm, Sat-Sun 10am-5pm) mean we're available when London's directors need us. Call 07450 258975 or book online to discuss your director pay optimization and company accounting.