Salary vs Dividends: The Optimal Mix for 2024-25

One of the most common questions UK company directors ask is: "Should I take salary or dividends?" The answer, as with most tax questions, is "it depends" – but there are some general principles that apply to most small company directors.

The Basic Strategy

For most directors, the optimal approach is to take a salary equal to the Personal Allowance (£12,570 for 2024-25) and extract the rest as dividends. This strategy works because:

• Salary up to the Personal Allowance is tax-free
• You avoid National Insurance on dividends
• Dividends are taxed at lower rates than salary

Why £12,570 Specifically?

The Personal Allowance for 2024-25 is £12,570. Taking this as salary means:

• No PAYE tax (it's within your Personal Allowance)
• No Employee National Insurance (it's below the Primary Threshold)
• Minimal Employer National Insurance
• You're building up qualifying years for State Pension

When Dividends Make Sense

After taking your optimal salary, dividends become attractive because:

• No National Insurance contributions (12.5% saving immediately)
• Lower tax rates: 8.75% basic rate vs 20% income tax
• £500 dividend allowance is tax-free

Important Considerations

This strategy isn't right for everyone. Consider these factors:

• State Pension: You need to earn at least £6,396 (2024-25) to qualify for a year of State Pension. Taking £12,570 salary covers this.
• Mortgage Applications: Lenders often prefer to see regular salary income rather than dividends.
• Company Profits: You can only take dividends if your company has made a profit after Corporation Tax.

Use the Calculator

The best way to understand your specific situation is to use our calculator. Try different combinations of salary and see how they affect your take-home pay. Remember to account for your company's profitability and any other employees you have.