Most owner-managed company directors take a small salary and top up their income with dividends. It's a well-worn approach, but the numbers behind it change every year, and what worked in 2022 may now cost you money.
Start with the salary
A salary set at or around the National Insurance secondary threshold keeps your state pension record intact and is usually deductible for Corporation Tax. If you have other employees, the Employment Allowance can make a slightly higher salary worthwhile, because it wipes out much of the employer's National Insurance.
Then layer in dividends
Dividends are paid from profits after Corporation Tax and carry their own tax rates. The dividend allowance is now small, so most directors will pay some dividend tax. The trick is to stay within the basic rate band where you can, and to time larger dividends across tax years rather than taking a lump sum all at once.
Don't forget pensions
Employer pension contributions are often the most efficient way to extract profit. They're deductible for the company, free of National Insurance and don't count as your income. For directors who don't need every pound today, this is frequently the biggest win.
Get it modelled
Every director's situation is different. At Ledgerly & Co we model your salary, dividend and pension mix each spring so you go into the new tax year with a clear plan rather than a guess.
Written by
Rachel Moore
Managing Partner, FCA
Founded Ledgerly & Co after a decade in corporate finance. Specialises in owner-managed businesses and tax planning for directors.
