The building blocks of owner payments

As a director-shareholder, you have three main levers for taking money out of your company: salary, dividends, and bonuses. Each has a different tax and National Insurance (NI) treatment. Salary and bonuses are deductible for corporation tax (CT) but attract PAYE and NI. Dividends are paid from post-tax profits and are not deductible, but they avoid NI. Your aim is to combine them in a way that minimises the total tax and NI bill while keeping enough profit in the company for future needs.

Salary: the foundation of your plan

Most owner-managers start with a salary up to the personal allowance (£12,570 in 2024/25) so no income tax is due. Employee NI also starts at that same point, so no employee NI is payable. However, employer NI begins at £9,100 per year (the secondary threshold). If your company can claim the Employment Allowance (up to £5,000), you may be able to pay a £12,570 salary with no employer NI. But single-director companies are often excluded from the Employment Allowance, so you may prefer to set salary at £9,100 to avoid employer NI entirely.

Some owner-managers still choose £12,570 and pay employer NI at 13.8% on the excess (£3,470 × 13.8% = £479). That can make sense because the extra salary is deductible for CT. If your company pays CT at 19%, the deduction saves £659 in CT, so the NI cost is covered. Always run the numbers for your own situation.

• Personal allowance: £12,570 – no income tax.
• Employee NI: 8% on earnings above £12,570.
• Employer NI: 13.8% on earnings above £9,100, unless covered by the Employment Allowance.
• CT deduction: salary reduces your company’s taxable profit.

Dividends: tax-efficient but not deductible

Dividends are paid from profits after CT. They are not a business expense, so your company gets no CT deduction. But they do not attract NI. For 2024/25, the dividend allowance is £500, then tax rates are 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate). Compare that with salary, where you might pay 20% income tax plus 8% employee NI plus 13.8% employer NI. Dividends often win for amounts above the optimal salary, especially if you are a basic-rate taxpayer.

Remember that because dividends come from post-CT profits, the company has already suffered CT. For a small company paying 19% CT, £1,000 of profit leaves £810 for dividends. If you took that £1,000 as salary instead, it would be deductible, so no CT, but you would pay income tax and NI. The comparison is never as simple as just comparing rates. You also need enough retained profits and the correct share class and paperwork.

• Dividend allowance: £500 tax-free.
• Basic rate: 8.75%.
• Higher rate: 33.75%.
• Additional rate: 39.35%.
• No NI on dividends.

Bonuses: a flexible top-up

A bonus is taxed like salary – PAYE and NI apply. But it is deductible for CT. That makes it useful if you want to reduce company profits and you are comfortable with the NI cost. Bonuses can be paid at any time, but timing matters. Paying a bonus in a year when you have spare basic-rate band can be cheaper than paying it in a higher-rate year. Employer NI on bonuses can also be significant. Some owner-managers use bonuses instead of dividends when they want to keep the company’s CT bill down, or when they have not yet declared a dividend. Always compare the total tax: bonus income faces income tax plus employee NI plus employer NI, while dividend income faces dividend tax only, but with no CT deduction.

Finding your sensible mix

There is no one-size-fits-all answer. A common approach is:

• Pay a salary up to the personal allowance or the employer NI threshold, depending on whether you can claim the Employment Allowance.
• Top up with dividends to meet your income needs, using the dividend allowance and your basic-rate band.
• Consider a bonus if you want to reduce CT and have basic-rate band available.
• Review annually, as thresholds and rates change.

Example: In 2024/25, a company with £60,000 profit before owner payments. Option A: £12,570 salary (no Employment Allowance) plus employer NI of £479, CT on the remaining profit, then dividends. Option B: £9,100 salary, more dividends. The best choice depends on your other income, Employment Allowance eligibility, and how much profit you want to leave in the company. Ask your accountant to model both, or use accounting software that can compare scenarios.

Also watch the £100,000 personal allowance taper. If your total income exceeds £100,000, your personal allowance reduces, which can make dividends or bonuses more expensive. Keeping income below that threshold is often a key part of the plan.

Keeping it compliant and flexible

Whatever mix you choose, keep proper records: board minutes for dividends, dividend vouchers, and payroll records for salary and bonuses. Pay dividends only from retained profits. If you take a salary, run payroll even if no PAYE is due. And remember that tax rules change – the personal allowance, NI thresholds, and dividend rates can shift. A quick annual review with your accountant will keep your plan efficient and stress-free.