Over the last few years, the tax climate for owner managers has changed considerably. I have often been asked if it is better to receive a salary/bonus or a dividend. Bear in mind that companies pay tax at 19/25% and dividends are paid after deduction of company tax and tax on a dividend is in addition to corporation tax.
The effective tax rate for a basic tax rate dividend is 27.75% (8.75+19) rising to 64.35% (39.35+25).
Personal; tax is 20% at the basic rate and rises to 40 and then 45%.
National insurance is:
Employers 13.8% but is allowable against company profits.
Employees 8% up to £50,270 then 2%
Back in 2016/2017 dividend allowance was £5,000.
In 2018/19 this fell to £2,000
In 2023/24 it fell again to £1,000
And in 2024/25 to £500
No tax is payable on dividends within the dividend allowance.
How dividends are taxed:
8.75% if total income falls below the basic rate of £50,270
33.75 if total income exceeds £50,270 and below £125,140
39.35 if total income exceeds 125,140
Remember personal allowance diminishes after £100,000 and is Nil after £125,140.
Ignoring personal allowance and employers NI of 13.8%, the rough comparisons are
Dividend Salary
Basic27.75%28%.
In between33.75%42%
Higher rate64.35%47%
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