As a UK company owner/director, you’ve probably questioned what the most efficient method for taking money out of your business is. Usually, this involves choosing between taking a full salary or a small salary with the rest being taken as dividends.

Below we’ll compare what it looks like when you take a £12,570 salary plus dividends and compare the full salary levels of £30,000, £50,000, £80,000, and £100,000.

As you are the employer, we’re also factoring in the cost of employers NI in the full salary option, and the cost of corporation tax in the dividend option.

In the table immediately below it skips the calculations and gives you the numbers you’re here to see. If you’re interested in seeing the full calculations, and an explanation of them, keep scrolling down.

The Results

For the full salary scenarios, the numbers above take employer’s NI off your net income.

In reality, the business will have paid out £100,000 for your salary plus £12,544 in employer’s NI.

For example, in the £100,000 salary option, the total cost is £112,544 to extract £70,161 (which is full salary take home plus employer’s NI), whereas in the £100,000 dividend option it costs £100,000 to extract £66,819.

We feel the numbers in the table above are a simpler way of illustrating the difference.

One last point is that the above tax calculations are based on you having no income from any other sources.

The Reality

If the aim is absolute maximum income, there’s very little question dividends are the way to go. This may not suit your needs, however. For example if you’re looking to get a mortgage in the near future, there are less lenders that consider dividends as income which would limit your options on mortgage provider.

When taking dividends you need to remember that dividend tax is a personal tax paid by you as an individual. Practically, this means you’ll take more out of your business than the above numbers suggest and you’ll have to put money aside to pay the dividend tax when the financial year ends and you submit your self-assessment.

Understanding the Tax Implications

Corporation Tax Considerations

One thing that is commonly forgotten about dividends is that they are paid AFTER corporation tax.

When you are the owner of the business, this matters, as the company money is essentially your money, and any tax, or cost, affects what you can take home.

The current rate of corporation tax starts at 19% and goes up to 25%, depending on your total profit.

For the calculations below, we’re assuming there is £30,000, £50,000, £80,000 and £100,000 of net profit to take out of the business. This means that the corporation tax will change. For the £30k and £50k scenarios, it will be 19% For the larger scenarios, it will be a tapered amount and lay somewhere between 19% and 25%.

Income Tax and National Insurance Contributions

The current personal allowance for income tax is £12,570, meaning no income tax is payable up to this amount. For income tax after the personal allowance, the tax rates are:

• 20% on the next £37,700 (Basic rate)
• 40% from there up to £125,140 (Higher rate)
• 45% on earnings above £125,141 (Additional rate)

For National Insurance (NI), the rates are:

• Employee’s NI: 0% on the first £12,570, 8% on the next £37,700, and 2% on all additional earnings.
• Employer’s NI: 13.8% on all earnings above £9,096.

Dividend Tax

Dividends are charged at:

• 0% on the first £500
• 8.75% on any income that falls into your basic rate tax bracket.
• 33.75% on income falling into the higher rate tax bracket.
• 39.35% on income falling into the additional rate tax bracket.

Salary Comparisons

Let’s calculate the net income of £30,000, £50,000, £80,000, and £100,000 both ways: entirely as a salary and as a £12,570 salary with the rest as dividends.

The Calculations

Salary Calculation Order

Step 1 – Calculate the employer’s and employees NIC’s from the salary amount.

Step 2 – Calculate the income tax after employee NIC’s have been deducted from the initial amount.

Step 3 – Calculate the net pay by deducting the employer’s NIC’s, employee’s NIC’s and the income tax.

Dividend Calculation Order

Step 1 – Calculate the employer’s NIC’s on the salary between £9,100 (the Secondary Threshold) and £12,570.

Step 2 – Calculate the corporation tax after deducting the £12,570 salary & employer’s NIC’s.

Step 3 – Calculate the dividend tax after deducting the salary, employer’s NIC’s, corporation tax & dividend tax allowance.

Step 4 – Deduct employer’s NIC’s, corporation tax and dividend tax from the original amount to calculate the net pay.

£30,000 Profit to be extracted

Salary Only

• Employer’s NI: (£30,000 – £9,100) x 13.8% = £2,884.20
• Employee’s NI: (£30,000 – £12,570) x 8% = £1,394.40
• Income Tax: (£30,000 – £1,394.40) x 20% = £3,207.12
• Net Take-home: £30,000 – £2,884.20 – £1,394.40 – £3,207.12 = £22,514.28

Salary + Dividends

• Employer’s NI: (£12,570 – £9,100) x 13.8% = £478.86
• Corporation Tax: (£30,000 – £12,570 – £478.86) x 19% = £3,220.72
• Dividend Tax: (£30,000 – £12,570 – £478.86 – £3,220.72 – £500) x 8.75% = £1,157.66
• Total Take-home: £30,000 – £478.86 – £3,220.72 – £1,157.66 = £25,142.76

£50,000 Profit to be extracted

Salary Only

• Employer’s NI: (£50,000 – £9,100) x 13.8% = £5,644.20
• Employee’s NI: (£50,000 – £12,570) x 8% = £2,994.40
• Income Tax: (£50,000 – £2,994.40) x 20% = £9,401.12
• Net Take-home: £50,000 – £5644.20 – £2,994.40 – £9,401.12 = £31,960.28

Salary + Dividends

• Employer’s NI: (£12,570 – £9,100) x 13.8% = £478.86
• Corporation Tax: (£50,000 – £12,570 – £478.86) x 19% = £7,020.72
• Dividend Tax: (£50,000 – £12,570 – £478.86 – £7,020.72 – £500) x 8.75% = £2,575.16
• Total Take-home: £50,000 – £478.86 – £7,020.72 – £2,575.16 = £39,925.26

£80,000 Profit to be extracted

Salary Only

• Employer’s NI: (£80,000 – £9,100) x 13.8% = £9,784.20
• Employee’s NI: ((£80,000 – £50,270) x 2%) + (£37,700 x 8%) = £3,610.60
• Income Tax: ((£80,000 – £3,610.60 – £50,270) x 40%) + (£37,700 x 20%) = £17,987.76
• Net Take-home: £80,000 – £9,784.20 – £3,610.60 – £17,987.76 = £48,617.44

Salary + Dividends

• Employer’s NI: (£12,570 – £9,100) x 13.8% = £478.86
• Corporation Tax: (£80,000 – £12,570 – £478.86) x 20.8% = £13,992
• Dividend Tax: ((£80,000 – £12,570 – £478.86 – £13,992 – £37,700 – £500) x 33.75%) + (£37,700 x 8.75%) = £8,279.96
• Total Take-home: £80,000 – £478.86 – £13,992 – £8,279.96 = £57,249.18

£100,000 Profit to be extracted

Salary Only

• Employer’s NI: (£100,000 – £9,100) x 13.8% = £12,544.20
• Employee’s NI: ((£100,000 – £50,270) x 2%) + (£37,700 x 8%) = £4,010.60
• Income Tax: ((£100,000 – £4,010.60 – £50,270) x 40%) + (£37,700 x 20%) = £25,827.76
• Net Take-home: £100,000 – £12,544.20 – £4,010.60 – £25,827.76 = £57,617.44

Salary + Dividends

• Employer’s NI: (£12,570 – £9,100) x 13.8% = £478.86
• Corporation Tax: (£100,000 – £12,570 – £478.86) x 22.2% = £19,292
• Dividend Tax: ((£100,000 – £12,570 – £478.86 – £19,292 – £37,700 – £500) x 33.75%) + (£37,700 x 8.75%) = £13,241.20
• Total Take-home: £100,000 – £478.86 – £19,292 – £13,241.20 = £66,987.94