Director Salary or Dividends?

So, you’ve decided to register as a Limited company, and  now you are thinking what is the best way to pay yourself for all of the hard work you are putting into your business.

Deciding weather paying your directors a salary or through dividends is best for your business and directors can be complex, with lots of advantages and disadvantages for both options.

Lets look into the details of both options.

Directors Salary

By becoming a director of your company, you are technically an employee of the company. This means you can pay yourself a salary through the company payroll.

Dividends 

Dividends are a share of company profits distributed to shareholders.

Features, Advantages and Disadvantages of Directors Salary

By paying yourself a salary you are able set a regular amount, paid at regular intervals, and brings many different benefits. Along with a salary, you are likely to be able to utilise other employee perks, as well as pension contributions. Choosing to pay yourself a salary is considered to offer more stability.

However, both employee and employer have to pay National Insurance Contributions on salaries paid/earned.

Directors salaries also attract a higher level of income tax than that of dividends, potentially meaning higher personal tax liabilities for directors.

Features, Advantages and Disadvantages of Dividends

As a director, if you own shares in the company, you can chose to pay yourself through dividends. However, in order to do this, the business must be profitable.

There are several advantages to paying yourself in this way, firstly that dividends are taxed at a lower rate. Dividends also offer a level of flexibility around timings and values, enabling you to meet your personal financial needs.

However, only directors that own shares in the company are able to paid dividends, and they must be based on the company’s profits.

It is also worth noting that recent cuts to dividend allowances means that bigger amounts of dividend payments will be taxed at a higher rate, reducing the tax benefit.

Things To Consider

Choosing which option to use to pay yourself depends on a number of factors, and is something to discuss with your accountant. Some things to consider include

Tax Efficiency – Think about the tax implications on yourself and your business, and the potential savings. Work with your accountant to establish what is best for you

Financial Stability – Paying yourself a salary may be consider more stable than receiving dividends, which may be worth considering if your personal circumstances will benefit from it. Think mortgage applications, and personal commitments.

Retirement Planning – Consider how the two options align with your retirement plans.

Personal Circumstances – Other personal circumstances need to be taken into account. Do you have any other income streams? These all need to be considered together.