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Salary or dividend?

When is it beneficial for a company owner or director to take a dividend rather than salary?

Many people running businesses prefer to do so through a limited company rather than as a sole trader. One reason is that the company pays corporation tax at rates of 20% or 21% against income tax rates of up to 45% for a sole trader. The company can therefore shelter profits at a lower rate of tax.

This is fine until the business owner wishes to extract profits from the company for his or her personal use. A payment of a salary or bonus, for example, often increases the overall amount of tax. Paying a £100 bonus from a company to its director saves perhaps £20 in corporation tax but could mean the director pays £40 or even £45 in income tax, thus increasing the overall tax bill by £20 or £25.

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