Salary or dividends

There is no magic number, only a sum

Anyone who gives you a salary figure without asking how many directors are on the payroll, what the company profit is and whether you have other income is guessing. Here is the sum itself, so you can do it on your own numbers.

Set the salary. It is a company expense, so it cuts corporation tax, but above a threshold it triggers employer National Insurance.

Whatever profit is left pays corporation tax.

Dividends come out of what survives, and are taxed again in your own hands at a lower rate than salary.

Add your other income. A rental, a spouse’s wage into the same company, a part-time PAYE job: each one moves the answer.

Three companies, same question

Illustrative, rounded, and deliberately not a calculator. The point is the shape of the answer, not the last pound.

SituationWhat usually happensWhere it goes wrong

Sole director, no other incomeSalary set at the point where NIC starts, the rest drawn as dividends across the yearDrawing the lot in March and pushing yourself into the higher rate in one go

Two directors, both workingTwo salaries, and the employment allowance becomes available, which changes the thresholdPaying a spouse for work they do not do. That is the one HMRC actually looks at

One inside contract, one outsidePAYE already deducted on the inside work; the company only has the outside profit to play withForgetting the inside income has already used up the basic rate band

The five numbers that move it

Personal allowance

Tapers away once income passes £100,000, which creates a band where an extra pound is taxed brutally.

Dividend allowance

Small, and it has been cut twice. Worth having, not worth planning around.

Secondary NIC threshold

Where employer National Insurance starts. This is the figure that sets the “optimal” salary everyone quotes.

Employment allowance

Only available if there is a second employee. A single-director company does not get it.

Marginal relief

Between the small profits rate and the main rate, each extra pound of profit is taxed at a rate higher than both.

We keep the current year’s figures printed on the handout rather than on this page, because thresholds move in March and a website that quietly goes stale is worse than no website.