Tandem Blog - dividends or PAYE

Dividend or PAYE

Whether dividends or PAYE is the most tax efficent for your small business is a common question we get at Tandem. For many years a company director was advised to pay themselves a minimal director’s salary and then profits permitting to make up their income by dividends, solely because of the tax advantages. IS THIS STILL RELEVANT – has the balance tipped between PAYE and dividends?

As with all cases regarding tax it comes down to the individual circumstances, however I would consider DO NOT take for granted you are still paying yourself in the most tax
efficient manner if you are still paying yourself this way. It may be time to review how you pay yourself as a compnay director.

What are the factors to consider for a director’s salary?

The contributing factors for asking your accountant for a review on your director`s salary are:

Dividend Income Tax Rates

From April 2022 the rates of income tax applicable to dividends increased each rate by 1.25%.

Dividend Allowance

This is the amount you can pay yourself in dividends without any tax implications.

  • In April 2023/2024 tax year this amount was reduced from £2,000 to £1,000
  • In April 2024/2025 tax year this amount will be reduced to £500

Corporation Tax

This is where a limited company pays tax on its profits.

The main rate of Corporation Tax from effect 1st April 2023 :

  • Profit below £50,000 the rate is 19%
  • Profit between £50,000 and £250,000 (eligible for marginal relief) the rate is 25%
  • Profit above £250,000 (not eligible for marginal relief) the rate is 25%.

So, how do I know whether Dividend or PAYE is right choice for me?

As you can see there are numerous deciding factors to take into account when calculating how much tax you must pay.

During the pandemic I saw a lot of directors increasing their PAYE salary and reducing dividends, basically because of reduced or ceased trading at the time, profits would not be sufficient to pay a dividend. However, once normal service was resumed, many went back to a dividend based salary.

 Now with the Corporation Tax rate increase and Dividends changes I would urge all Directors to seek a review ensuring they are remaining tax efficient.

Who can I talk to about choosing dividends or PAYE?

If you would like to find out more on how we at Tandem Business Solutions can assist you with your tax affairs please just click on the BOOK A CALL button at the top of our website.

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