Salary vs Dividends: How Each Is Taxed for Company Directors
Company directors are often paid through a mix of salary and dividends. Each is taxed under separate rules: salary through PAYE and National Insurance, dividends through the dividend allowance and dividend tax rates. This guide sets out each set of rules side by side.
Two ways a director can be paid
A director who also owns shares in their company usually has two ways of taking money out of it: as a salary for the work they do, or as a dividend from the company's after-tax profit as a shareholder.
The two are taxed under completely separate rules. This guide sets out each set of rules as parallel facts.
How salary is taxed
Salary is employment income, taxed through PAYE (Pay As You Earn) in the same way as any other employee's pay: Income Tax is deducted using the Personal Allowance and the standard tax bands, and employee National Insurance is deducted above the primary threshold.
The company also pays employer National Insurance on the salary, above its own secondary threshold. This is a cost to the company, separate from what is deducted from the director's pay.
- Income Tax: charged on salary above the Personal Allowance, at the normal basic, higher and additional rates.
- Employee National Insurance: charged on salary above the primary threshold.
- Employer National Insurance: charged on salary above the secondary threshold, paid by the company, not deducted from the director's pay.
How dividends are taxed
Dividends are paid from the company's profit after Corporation Tax has already been charged on it. They are then taxed again on the director personally, but under separate dividend tax rules rather than the Income Tax bands used for salary.
Each tax year, a set amount of dividend income is tax-free under the Dividend Allowance. Dividend income above the allowance is taxed at the dividend basic, higher or additional rate, depending on which Income Tax band the dividend income falls into once added on top of any other income.
- Dividend Allowance: a tax-free amount of dividend income each tax year.
- Dividend basic rate: charged on dividend income above the allowance that falls within the basic rate band.
- Dividend higher rate: charged on dividend income that falls within the higher rate band.
- Dividend additional rate: charged on dividend income above the additional rate threshold.
Side by side
| Salary | Dividends | |
|---|---|---|
| Paid from | Company profit, before Corporation Tax | Company profit, after Corporation Tax |
| Main tax | Income Tax, via PAYE | Dividend tax |
| Tax-free amount | Personal Allowance | Dividend Allowance |
| National Insurance | Employee and employer National Insurance apply | No National Insurance applies |
| Counts towards State Pension record | Yes, if above the lower earnings limit | No |
Both salary and dividends are taxed on the director personally in the tax year they are paid, alongside any other personal income the director has.
Official sources
Key takeaways
- Salary is taxed through PAYE, using Income Tax bands and National Insurance, before Corporation Tax has been charged on that part of the company's profit.
- Dividends are paid from profit after Corporation Tax, then taxed again on the director personally under separate dividend tax rules.
- The Dividend Allowance is separate from the Personal Allowance; each has its own tax-free amount.
- Dividends are not subject to National Insurance; salary is, for both the director and the company.
- This guide sets out the rules for each as parallel facts, without suggesting an optimal split.
Frequently asked questions
Is it better to take salary or dividends?
Do dividends use up the Personal Allowance?
Can a company pay a dividend at any time?
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This guide explains, as parallel facts, how salary and dividends are taxed for company directors. It is not personal tax advice and does not recommend a particular mix of salary and dividends. Rules and thresholds change between tax years; check current figures for your situation.