As an owner of a limited company, often the most tax-efficient way of paying yourself is through a mix of a small salary and dividends. The small salary is usually set to minimise income tax and National Insurance.
For the 2024/25 tax year a tax-efficient salary would typicallybe between£9,100 and £12,570 for the majority of people. For guidance on choosing the bestsalary for your directors, take a look at our guide on choosing a tax efficient salary.
By taking a small salary, you ensure that your National Insurance contributions are up to date and you are tax efficient by taking the rest of the profits you make as dividends.
What are dividends?
Dividends are a distribution of profits by a company to its shareholders. Dividend payments must be taken after corporation tax on the company profits is accounted for.
Why are dividends tax efficient?
Dividends are taxed at a lower rate than salary and do not incur National Insurance.
After the company pays Corporation Tax, in the 2024/25 tax year, a basic rate tax payer (with a personal taxable income* of £50,270 or less) will pay 8.75% Income Tax on the dividends received over £500; a higher rate tax payer (with a personal income* of more than £50,270) will pay 33.75% Income Tax on the dividends received over £50,270.
As dividend income is added to your other taxable income and taxed last, you pay tax on dividend income based on your highest income tax band. As you have a dividend allowance of £500 you will only be taxed on amounts above this allowance.
The tax to pay on income (including the dividends you pay yourself) is calculated at the end of the tax year via yourself assessment tax return and paid by you personally.
When can you pay dividends?
You can distribute dividends any time and at any frequency throughout the year, providing there is enough profit in your company to do so. You need to ensure that all the dividend payments are covered by the company profits net of corporation tax. So what does this look like from a contractor or consultant’s point of view?
Income (minus the VAT if you are VAT registered) from contracts outside of IR35** Less Expenditure (salary, employers NIC, all business expenses) = Taxable profit Less Corporation Tax @19% if company is subject to the small profits rate =Maximum dividend available for distribution to shareholders
**A note on IR35 – Dividends cannot be taken on contracts falling within IR35. You must take all the income earned from these as salary. For more information on IR35, look at our IR35 guide. Any income from contracts falling inside IR35 must be treated separately.
Most contractors and small business owners pay dividends frequently throughout the year. All you need to do is ensure that the dividends you distribute are covered by the profits net of expected Corporation tax and that you leave enough cash within the business as operating capital to meet your future outgoings.
How do you pay dividends?
Every limited company has to ensure that they document the declaration of dividends appropriately. Here are the typical steps that are required before a dividend can be paid. This can be onerous if you have to produce the documentation yourself.
Calculate the company profit available.
Hold a director’s meeting and produce minutes documenting the dividend payment decision.
Print and retain the minutes.
Produce a dividend voucher detailing the dividend payment.
Declare the dividend.
With inniAccounts, it is easy to declare dividends. The software calculates the profits and live cash available for dividend payments, in real time. You can see these figures any time you want. As all your expenses and projected VAT and Corporation Tax liabilities are already deducted; you can be confident you are releasing the right amount of cash from the business.
You can create a dividend and download the minutes and dividend voucher detailing the payment with a few simple clicks. Then all you need to do is make the payment to the shareholders.
For some LLC members, they can choose to get paid by hiring themselves as an independent contractor working for an LLC they happen to own. Although independent contractors don't have payroll taxes taken out of their paycheck, you don't end up saving any money on your taxes with this method.
There's no limit, and no set amount – you might even pay your shareholders different dividend amounts. Dividends are paid from a company's profits, so payments might fluctuate depending on how much profit is available. If the company doesn't have any retained profit, it can't make dividend payments.
You can start paying yourself when your business starts making enough money to cover its expenses and generate a profit. It's important to make sure that your business is financially stable before you start paying yourself.
There is no set schedule for dividend payments. They are entirely at the discretion of the board of directors. It is common to make a decision on dividends quarterly or every six months.
For many LLC owners, the most advantageous way to receive payment is to treat yourself as an employee. In this arrangement, you—and other owners who actively work in the business—are employees/owners, and you receive paychecks just as you would as an employee of someone else's business.
That's called an owner's draw. You can simply write yourself a check or transfer the money for your business profits from your LLC's business bank account to your personal bank account. Easy as that!
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You must buy shares before the ex-date to receive the declared dividend. The record date is the day on which you must be on the company's books as a shareholder to receive the declared dividend. The payment date is the day the company pays the declared dividend to shareholders who own the stock before the ex-date.
Key takeaways. The "pay yourself first" budget has you put a portion of your paycheck into your savings account before you spend any of it. The 80/20 rule breaks out putting 20% of your income toward savings (paying yourself) and 80% toward everything else.
You can pay yourself as a business owner by setting a regular salary or taking owner's draws. Maintain clear financial separation between personal and business accounts, and choose an amount that aligns with your business's financial health.
The business entity can set the frequency of payments in its operating agreement. If you expect your percentage of the year-end LLC profits to be $12,000, you could set up a draw to receive $1,000 each month as personal assets from the business bank account.
The 45 day rule (sometimes called dividend stripping) requires shareholders to have held the shares 'at risk' for at least 45 days (plus the purchase day and sale day) in order to be eligible to claim franking credits in their tax returns.
Section 123(1) of the Act inter-alia states that “no dividend shall be declared or paid by a company for any financial year except out of the profits of the company for that year or out of the profits of the company for any previous financial years”.
For single filers, if your 2023 taxable income was $44,625 or less, or $89,250 or less for married couples filing jointly, then you won't owe any income tax on dividends earned.
If you choose to pay yourself a salary from your LLC as an employee, you will pay income tax on your wages earned, and the LLC must file a W-2 form to show the IRS your payments and withheld taxes. You'll need to file IRS Form W-4 to determine the amount of income tax that the LLC should withhold from your paychecks.
Like any other business, an LLC has the option to hire employees as well as independent contractors. That means you can 1099 yourself even if your LLC has employees. It's important to file all paperwork correctly for both employees and independent contractors to maintain the LLC in good standing.
Can you pay yourself on a 1099? Since IRS Form 1099-MISC, Miscellaneous Income and Form 1099-NEC, Nonemployee Compensation are intended to report payments made to individuals who are not employees, they are generally not an option for S corporation owners, many of whom are also employees.
Introduction: My name is Francesca Jacobs Ret, I am a innocent, super, beautiful, charming, lucky, gentle, clever person who loves writing and wants to share my knowledge and understanding with you.
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