Quick answer
Salary is paid through payroll and can involve income tax, employee National Insurance and pension deductions. Dividends are paid to shareholders from company profits after corporation tax.
A salary/dividend mix should be checked against company profit, payroll setup, pension plans, National Insurance record and dividend paperwork.
Worked example: £12,570 salary plus £40,000 dividends
A director might model £12,570 salary and £40,000 dividends to estimate personal take-home for the year.
The salary part is handled through payroll. The dividend part is placed on top of salary and other taxable income when estimating dividend tax.
This example is only a personal tax illustration. It does not prove the company has enough distributable profit to pay the dividends.
Practical explanation
Salary is normally an allowable company expense, so it can reduce company profit before corporation tax. Dividends are not a company expense.
Dividends should be supported by company profit and paperwork. They are not a substitute for payroll wages.
Directors also need to think about pension contributions, National Insurance record, cash left in the business and timing of payments.
Common mistakes
Treating dividends like salary and paying them without checking distributable profits.
Ignoring corporation tax when looking only at personal dividend tax.
Assuming there is one optimal salary for every director. Personal and company circumstances matter.
Try the calculator
Use the related calculator to test the numbers against your own assumptions.
Director Salary & Dividend CalculatorDisclaimer
This guide explains common mechanics only. It is not accountancy, tax, payroll or financial advice, and it does not recommend an optimal director salary.