One of the biggest advantages of operating through a limited company is the ability to structure your income in a tax-efficient way. The salary and dividend split is the most well-known example — but it's also one of the most commonly misunderstood.
Why not just take a salary?
When you pay yourself a salary, both you and your company pay National Insurance contributions on top of income tax. Dividends, on the other hand, don't attract National Insurance — so the same amount of money extracted as a dividend is taxed more lightly than as salary.
The typical approach
Most limited company directors take a small salary — typically set at the National Insurance threshold — and then top up their income with dividends from company profits. This keeps NI costs low while maintaining your NI record for state pension purposes.
The important caveat
You can only pay a dividend if your company has sufficient distributable profits. Paying a dividend out of a company with no profit is illegal — so this needs to be done correctly with proper records, including dividend vouchers and board minutes.
Getting this right can make a meaningful difference to your take-home pay. Get in touch if you'd like to review your current arrangement.