By Liz Elliott, Director at McEwan Wallace
If you run your own company, chances are you've found yourself wondering at some point: Should I take this bonus as salary, or would a dividend make more sense? It's a fair question—and one we get asked a lot.
Truth is, there's no one-size-fits-all answer. The best route depends on a few moving parts—like how much profit your company's making, what you already earn, how much tax and National Insurance you're paying, and whether you're using the allowances available to you.
Salary: The Good, the Bad, and the Taxman
Taking a bonus as salary means it's taxed through PAYE, so income tax and National Insurance get knocked off before the money hits your account. The upside? It can bump up your pension contributions and make you look stronger on paper if you're applying for a mortgage or loan. The downside? It might nudge you into a higher tax band, which nobody's thrilled about.
Dividends: More Efficient, with a Few Caveats
Dividends often come out on top when it comes to tax efficiency. You don't pay National Insurance on them, and they're taxed at lower rates than salary. That said, they can only be paid from post-corporation tax profits, and the tax-free dividend allowance has shrunk to just £500—so more of your dividend is likely to be taxable than a few years ago.
So… What's the Best Option?
Honestly? It depends. For many director-shareholders, the smartest option is often a blend of the two—using a mix of salary and dividends to strike the right balance between tax efficiency and personal goals.
At McEwan Wallace, we don't just guess. We use up-to-date tools and tailored calculations to show you exactly how different options affect your take-home pay. What works brilliantly for one person might be totally off for someone else.
If you're mulling over how to take your next bonus, give us a shout. We'll help you crunch the numbers and figure out what's best for you and your business.