Salary, dividends & benefits
Salary, dividends & benefits and how to pay yourself. We will throw some numbers in to show the financial difference. Furthermore we will be looking at other options that can really ramp up the savings.
Company owners and directors often ask us “do I pay myself salary and dividends, and how much should that be?”. Every situation is different, therefore the answer to the question depends.
How to pay yourself: Salary and dividends
Basic rule of thumb:
Salary, unlike dividends, is subject to employer’s and employee’s National Insurance contributions (NICs). A small amount is typically paid as salary so that it triggers the entitlement for the year to state benefits, the rest is paid out as dividends.
If we overlay some numbers:
For the 2024-25 tax year an annual salary of £9,100 plus is the trigger point for paying NICs.
Also there is a £1,000 dividend allowance and a basic rate payer pays at the rate of 8.75% and NICs are not payable on your dividends!
So dividends are generally advantageous when compared to a salary, particularly where they are taxed at only the basic rate. However, salary is essential for earning NICs credits, and tax relief for the company.
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Marginal tax rates
Your tax status will be either basic rate, higher rate or additional rate. Consequently this is a major factor in deciding the levels of salary and dividends to take out of your company.
Let’s throw in some tax speak and introduce marginal rates, marginal rates are the combined company and personal tax rates. Our handy table below summarises the marginal rates of taking out £1 in salary, or dividend.
So the normal rules apply where numbers are shown for illustration. As a result we’ve made some assumptions, situations vary, but the table below is still blooming useful. Our headline assumptions are personal and dividend allowance have been used up.
Paying Yourself: Salary v Dividends 24-25
| Employee Rate: Basic | Employeel Rate: Higher | Employee Rate: Additional | |
|---|---|---|---|
| Annual Income | < £50,270 | £50,270 + | £125,1400 + |
| Salary | 28% | 45% | 49% |
| Employee Savings/(cost) per £1,000 dividend | £189 | £418 | £511 |
| Employer Saving per £1,000 dividend | £332 | £698 | £820 |
The benefits of dividends over salary are more significant if you are a basic rate payer, the gap narrows once you are a higher rate payer and beyond. Hence dividends still come out on top and will still count as income if you are looking for a mortgage/
Company benefits
In my experience this is a legitimate area of tax planning that is under used. Planned correctly there can be significant savings for you’re and your business, who wouldn’t want that
Your company can pay for items which you might normally pay for personally. These can be provided tax free to you, and your business can claim these as business costs.
Examples include:
- Pensions
- Mobile phone
- Workplace parking
- Benefits
- Health screening and medical check-ups
- Home working allowance up to £6 per week
Tax on trivial benefits
There is no tax or NIC to pay on what are called trivial benefits. This means you don’t have to pay tax on a benefit for your employee if all the following apply:
It costs you £50 or less to provide
It is not:
- cash or a cash voucher
- a reward for their work or performance
- in the terms of their contract
These are known as a ‘trivial benefits’. There is no NIC pay, and no need to inform our friends at the tax office.
There is a financial limit applied trivial benefits for company directors, or, to a family member. The limit is a total cost of £300 for the tax year, enough to treat yourself, a few bottles of wine, and a bit of R&R!
Taxable benefits
It can make financial sense for your company to provide benefits in kind, i.e. pay for items that you would pay for personally. Benefits do not attract employee NIC, but they do attract (less) employer NIC. The big savings that can be made for each £1,000 of benefits are shown below.
Tax Savings: Salary v Employee Benefits: 2024-25
| Marginal Rate: Basic | Marginal Rate: Higher | Marginal Rate: Additional | |
|---|---|---|---|
| Annual | < £50,270 | £50,270 + | £125,140 + |
| Tax Savings per £1,000 | Tax Savings per £1,000 | Tax Savings per £1,000 | |
| Employee savings | £189 | £418 | £511 |
| Private company savings | £332 | £698 | £820 |
| Not for Profit company savings | £443 | £931 | £1,604 |
Personal savings include tax and NIC savings, company savings include NIC and employer costs (after tax relief).
We hope you’ve found this blog useful. Contact us if you have any questions on how to pay yourself or any other business queries. For more business and finance, news, advice and tips, don’t forget to watch our weekly broadcasts, listen to our weekly podcast I Hate Numbers.