How to choose between salary and dividends

Step 1 — set a tax-efficient base salary

Start with a salary around the National Insurance thresholds. It's a deductible cost for the company, keeps your state-pension record ticking, and uses your personal allowance — while staying below the point where National Insurance bites hard. This modest salary is the foundation of an efficient split. See salary vs dividends.

Step 2 — confirm the profit is there

Dividends can only come from distributable reserves — accumulated realised profit after corporation tax. Check the reserves genuinely cover what you plan to draw, using current figures. No reserves, no lawful dividend. This step stops you creating an unlawful distribution and an overdrawn loan account.

Step 3 — take dividends to the sensible point

Draw dividends on top of the salary up to where the marginal tax cost climbs steeply — usually around the higher-rate threshold. Dividends avoid National Insurance and are taxed more gently than salary, so they carry the bulk of your income efficiently. Beyond that point, each extra pound gets dear, so pause and consider the next step.

Step 4 — weigh a pension for the surplus

If there's still surplus and drawing more would be heavily taxed, a company pension contribution often beats another dividend — it moves profit out with no personal tax now. It defers access to pension age, but the saving is real, especially at higher-rate levels.

Step 5 — keep it lawful and affordable

Whatever the split, minute your dividend decisions, keep them within reserves, and never draw cash the company needs to trade. If your affordable draw is less than you'd like, grow the business rather than raiding it — and fund real needs properly. Credicorp lends to the company with no personal guarantee. Model it with the affordability calculator.