Bonus as Salary or Dividend: Which Pays Off?

If you run your own company, you might have the option to take a bonus either as salary or as a dividend. But which one leaves you better off?

The answer depends on several factors: how much profit your company has, your existing income, the current rates of tax and National Insurance, and whether you’re taking advantage of available allowances.

Salary: Pros and Cons

Taking a bonus as salary means it’s taxed through PAYE, with income tax and National Insurance deducted at source. It can boost your pension contributions and improve borrowing power (e.g. for mortgages), but it may also push you into a higher tax band.

Dividend: Pros and Cons

Dividends aren’t subject to National Insurance and are often a more tax-efficient way of taking money out of a company. However, they can only be paid from company profits after corporation tax. Also, the tax-free dividend allowance has now been reduced to £500, so more of the dividend is now taxable than in the past.

So, which is better?

It depends. Sometimes it makes sense to mix both to strike the right balance between tax efficiency and personal financial goals.

We use tailored calculations and up-to-date tools to help clients compare the actual take-home pay of different options. What works best for one director-shareholder might not be right for another.

Plan ahead with Wilds

There’s no one-size-fits-all answer when it comes to bonuses. The right approach depends on your company’s profits, your wider financial picture, and how you plan to use the money.

At Wilds, we’ll help you weigh up the pros and cons of salary vs dividend using real figures – so you can make the most tax-efficient choice for you and your business.

Get in touch if you’d like to explore your options before your next bonus decision.