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Owning a company means you can decide how much to pay yourself in salary, pension contributions, and what proportion of the profits to take as a dividend. Getting the split right is really important though as it makes a big difference to the tax and national insurance payable by both you and your company.

Assuming you have no other income, we’d normally recommend having a salary of £10,600 (personal allowance for 2015/16), which will be tax free. However, auto-enrolment rules state that a company with more than one employee (including directors) has to automatically enrol all employees receiving a salary over £10,000 (for 2015/16), to its company’s pension scheme.

On any salary over £8,060, you have to pay national insurance contributions (NIC) at 12%. So if the company pays you £10,600, NIC is charged on the extra £2,540 and you’ll take home £10,295. The company will also pay employer’s NIC of £343.34 (13.8%) on that salary. However, an employment allowance of £2,000 p.a. applies to most companies to set against NIC for all employees. This means the company won’t pay over NIC until the £2,000 allowance has been used up.

You could pay yourself a salary just below the NI threshold of £8,060, which would then generate a NI credit towards your state pension, but you won’t actually pay any tax or NI. However, unless you have other income, you’d then be ‘wasting’ £2,540 of your tax-free personal allowance. The NI credit will be attached to a dividend which also requires tax. A credit is worth 1/9th of the overall tax payable on the dividend.

Don’t forget that your company can also make contributions to your pension and receive a tax deduction for the cost. If you’re aged 55 or over, then from 6 April 2015 you‘ll be able to draw all of the funds from that scheme, but 75% of it will be taxable.

Taking money out of a pension scheme has complex and irreversible implications, so we recommend getting in touch with Paul Darley, our in-house chartered financial planner, before making any decisions concerning your pension.


2 comments on “salary, dividend or pension contribution?

  1. chris hitchinga

    After taking my salary of approx £11K i still have profits around 10K pa. is it best to pay the CGT on the 10K and then take a dividend or pay the 10K into a pension fund and no profit, CGT or Dividend

  2. Helen Brownsett

    Hi Chris, it very much depends on whether you want £10k personally to be able to spend yourself. If you don’t need the funds now, an employer pension contribution would be the most tax efficient way of extracting the profit – but you don’t have access for the funds until you are able to take your pension benefits. If you require the funds yourself, then you would be best paying corporation tax of £2k and then having a dividend of £8k (on which you would pay some tax also) for your own use.

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