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Business Owners
June 20, 2023

How to take income from your company

Matthew Sinclair APFS
Chartered Financial Planner
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Navigating your finances as a business owner: how to take income from your company

Deciding how you want to take an income from your company is a decision that requires a bit of planning on your part, and depends on what your personal circumstances are. In this post we'll discuss the different options available to you including either taking a salary or dividends as income, and the pros and cons of each option.

How should I take an income from my company?

Most directors of limited companies pay themselves in some combination of salary or dividends, often supplemented by company pension contributions. Finding the right combination for you will depend on a number of factors, such as:

  • Company's profits.
  • How much you want to reduce your personal tax bill.
  • How much you want to reduce the company's tax bill.
  • Whether you want to retain certain state benefits (e.g. state pension).

Taking a salary from your company

As a business owner or director, it's a good idea to take at least a small salary. This means putting yourself on your company's payroll. There are several benefits of taking part of your income as a salary.

The benefits of taking a salary

  • You build up qualifying years towards your state pension.
  • You can make higher personal pension contributions.
  • You can retain maternity / paternity benefits.
  • It can be easier to apply for things like mortgages and insurance policies such as critical illness cover.
  • You reduce the amount of corporation tax that your company pays (as salary is an allowable business expense).
  • You can take a salary even if your business makes no profit.

There are however several drawbacks of taking a salary, particularly when it's a larger salary.

The drawbacks of taking a salary

  • Taking a salary means that both you and the company have to pay National Insurance Contributions (NIC).
  • A salary also attracts higher rates of income tax than dividends.

Deciding how much of a salary to take

You don't pay income tax on your earnings until you pass the Personal Allowance (currently £12,570 in the 2023/24 tax year.)

However, you will have to pay NICs if your income passes the NIC Primary Threshold (also currently £12,570).

In addition, employer NICs become payable on any employee earnings above £9,100.

Note that in order to build up qualifying years for the state pension, your salary must be at or over the NIC Lower Earnings Limit (currently £6,396). Some directors therefore set their salaries between the Lower Earnings Limit and the Primary Threshold, so as to keep their state pension but avoid paying NICs.

Taking dividends as income

Many directors choose to take the majority of their income in the form of dividends, as this is usually more tax-efficient.

A dividend is simply a share of the company's profits. Profit is what is left over after the company has settled all its liabilities, including taxes. If there is no profit, then no dividends can be paid.

Dividends can be paid to directors and other shareholders, according to the proportion of shares that they hold. There is no requirement to pay all the profits as dividends, or even any of them. A company can retain profits over a number of years and distribute them as the board decides.

The benefits of taking dividends

  • Dividends attract lower rates of income tax than a salary.
  • No NICs are payable on dividends (neither employer's nor employees).
  • By taking most of your income in the form of dividends, you can significantly reduce your income tax bill.

Your dividend allowance

You have a tax-free dividend allowance, which is in addition to your personal allowance. In the 2023/24 tax year this allowance is £1,000. This means that you can earn up to £13,570 before paying any income tax at all.

Income tax rates on dividends

Dividends attract a much lower rate of income tax than salary does. There is also a slightly greater tax-free allowance when you are paid in dividends. You can see below for a comparison table.

The drawbacks of taking dividends

Although taking your income mostly in the form of dividends may seem like a no-brainer, there are certain limitations and pitfalls to watch out for.

  • Relying too much on dividends could make your income unpredictable
  • Dividends are paid after corporation tax has been deducted (unlike salary, which is a tax-deductible expense)
  • If you accidentally take a dividend that is not covered by profits, you will have taken out a director's loan which must be repaid
  • Dividends don't count as 'relevant UK earnings' for the purposes of tax relief on pension contributions that you make yourself

Receiving pension contributions directly from your company

A third possible way to receive tax-efficient remuneration is in the form of pension contributions directly from your company. This is different from contributing to your pension yourself, as it counts as an employer pension contribution.

The benefits of making employer pension contributions

  • Pension contributions don't add to your income, so don't increase your tax bill.
  • They are an allowable business expense, saving up to 19% in corporation tax.
  • There are no employer NICs to pay, potentially saving another 13.8%.
  • Employer pension contributions are not limited by the size of your salary.

The last point above is an important one. As an individual, you are not allowed to pay more into a pension in a year than your salary for that year. Therefore, if you are taking a small salary plus dividends (as outlined above) then you can't pay very much into your pension.

However, employer pension contributions are not limited in this way. They are limited only by the annual allowance, which is currently £60,000 per tax year. Your company can contribute up to this amount into your pension, even if you are on a small salary.

Considering retirement

Whilst retirement planning may not be a top priority in the midst of running a business, it is crucial to take proactive steps towards securing your own financial future. Pensions are a tax efficient way to extract wealth from your business, and this helps ensure that your own financial plan is diversified. Consulting a financial planner can be instrumental in securing financial stability for yourself and your business. We can help you to consider how much you can save into a pension.

If you're interested in learning more about our services and would like to schedule an initial meeting, feel free to reach out to us at 0191 384 1008 or email us at

Get your financial plan on the right track.

If you want a better view of what your future could be, we'll have a chat over a cup of coffee in our Durham office and work out if we can add any value to your financial picture.

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Matthew Sinclair (left) and Chris Breward (right), Chartered Financial Planners at Wealth of Advice