If you’re on this page, you may be wondering if you should be taking most of your income from salary or dividends…
It’s difficult to have a one size fits all approach to setting a tax efficient salary for a director of an owner/manager company.
In doing so we have looked at salary and dividends in isolation and we realise that other factors can influence the decision, such as; a standard personal allowance, you’re UK resident for tax, your only income is your salary and dividends from your limited company.
We don’t recommend the approach below if you are a contractor.
Tax Rates For Salary And Dividends In 2021/22 Tax Year
The personal allowance has increased from £12,500 to £12,570
Also the higher tax band has increased from £50,000 to £50,270
For income above this the tax rates are below ** (dividends tax rates are separate)
£12,570 to £50,270 20%
£50,271 to £150,000 40%
£150,001 & over 45%
Dividend Tax Rates In 2021/22
The dividend allowance remains at £2,000 as last year.
Above this £2,000, dividend income is taxed:-
- If you have any un-used personal allowance (£12,570), that element is tax free
- Dividends below the basic tax band (up to £50,270) taxed at 7.5%
- Dividends above the basic tax band (over £50,270) taxed at 32.5%
- Dividends in the upper tax band (£150,000+) taxed at 38.1%.
So, if your only income is dividends, you could receive £14,570 of tax free dividend income in 21/22 ( your personal allowance £12,570 and dividend allowance £2,000 taken together)
What Is The Most Tax Efficient Dividend And Salary Structure For 21/22
For directors of owner / managers companies there are a few considerations:-
- Ensure the salary is high enough for national insurance purposes in order that it counts towards your national insurance history to help protect your future entitlement to state pension
- Salary is a tax allowable cost for your business against Corporation Tax
- Additional amounts you withdraw from your company would be treated as dividends which do not attract national insurance contributions, although, note that dividends are not a tax allowable expense for your company
- Directors often choose to limit their total income to below the high rate tax band (£50,270 for 21/22)
We suggest a monthly gross salary of £735 (£8,820 per annum) because this is the highest amount you can pay yourself without paying employers or employees national insurance. But, you will maintain your entitlement to future state pension and benefits.
Then, assuming you prefer to take dividends up to the higher tax band, then this would leave you with £41,450 of dividend (£50,270 higher tax band – £8,820 salary).
We don’t recommend this approach if you are a contractor.
** there are different rates for Scottish tax payers