Dividends vs Wages: Maximise your income from your company
There are two main methods to take income from a company you own:
- Dividends
- Wages
Each of these methods have their own advantages and disadvantages.
What are Dividends?
Dividends are payments used to distribute a company’s profits between its shareholders. They are issued after tax and require a company to have a positive balance of profits/capital to distribute. If a company is making a loss, it cannot pay dividends.
What are the advantages of dividends?
The main advantage of drawing dividends is that they are taxed at a lower rate than wages. The basic rate of tax for dividends is 8.75%, while other income is taxed at 20%. For the higher rates of income, this increases to 33.75% and 39.35%, while other income goes up to 40% and 45%.
There is also an additional 0% tax band of £500 for dividends. This is not to be confused with an allowance, though. Where your regular personal tax-free allowance does not count towards your basic rate band income, this £500 does. Therefore, if after other income you have £15,000 left in your basic rate band and earn £20,000 of dividend income, £500 will be tax-free, £14,500 will be charged at the introductory rate, and the remaining £5,000 will be charged at the higher rate. For the 2024 tax year and before, the 0% band was £1,000, and for the years before that, it was £2,000.
What are the disadvantages of dividends?
The main disadvantage of using dividends is that they are not seen as expenses; therefore, they will not reduce your profit or corporate tax bill in the same way wages will.
You must also register for self-assessment and complete annual income tax returns for your dividend income. This makes you responsible for your own tax, while with wages, the company will pay your tax on your behalf. Depending on the amount of tax due, you may even have to make payments on account.
Another disadvantage is that no NICs are paid on dividend income. This means your state pension and other benefits may be affected if you only pay yourself through a dividend.
Finally, if other people have shares in your company, they must also be paid a dividend proportional to their shares. For example, if they own fifty percent of the company they will have to be given the same amount as you if you own the other fifty percent. This disadvantage can be mitigated by using another share type so you can have more control over how much dividend income is allocated to each share.
Which is best, dividends or wages?
As both wages and dividends have their advantages and disadvantages, it is difficult to say one is better than the other. Normally a combination of both yields the greatest tax savings depending on your personal tax situation.
Please do not hesitate to contact us if you would like any advice or assistance regarding the above or with any aspect of payroll or limited company accounting.
Adam is our managing director and a fully AAT-certified accountant. Adam founded Short Accounting in 2014 with the aim of helping business owners with their accounting and tax needs so that they can focus on growing and managing their businesses.
Over the years Adam has helped thousands of SMEs, sole traders, limited companies and more with the full range of accounting services. He’s a firm proponent of adopting the latest in accounting tech to help streamline processes to ensure that all of our clients get the best service possible.
