Dividend vs Salary from Your Personal Service Company

Why the split matters

Journalists who bill clients through a limited company — rather than as a sole trader — and who are working outside IR35 have a choice about how to extract the profit their company generates. Salary is subject to income tax and National Insurance Contributions (NICs) for both the company (employer NICs) and the individual (employee NICs), but is a deductible expense that reduces the company's Corporation Tax bill. Dividends are paid from profits after Corporation Tax has already been charged, are not subject to NICs, but are taxed at dividend rates that sit on top of your other income when calculating which tax band applies.

This is a live area of tax law and rates are reviewed at every Budget. This guide sets out the mechanics and the trade-offs so you can have an informed conversation with your accountant — it does not tell you the specific figures to use, since those change year to year.

The basic decision tree

How the tax bands interact

• 1Personal allowance: The amount of income you can receive before income tax applies. It tapers away entirely above a high-income threshold, which matters if a strong year pushes your total income up — a further reason to consider smoothing extraction across years.
• 2Basic-rate band: Salary and dividend income within the basic-rate band are taxed at the basic rates for each income type. Dividend rates are consistently lower than salary income tax rates at every band, which is the core of the tax efficiency of dividend extraction.
• 3Higher-rate band: Income above the basic-rate threshold is taxed at higher rates. Because dividends are treated as the “top slice” of income for banding purposes, a large dividend on top of other income can be partly taxed at the higher dividend rate even if your salary alone would sit in the basic-rate band.
• 4Additional-rate band: The top band applies above the highest threshold. Journalists with a strong year — a book advance, a major investigative project fee, or a wire-service retainer — should model whether spreading extraction across two tax years reduces the amount taxed at the additional rate.

National Insurance: employer and employee contributions

A PSC paying a director's salary has to consider two separate NIC charges: employer's secondary Class 1 NICs, which the company pays on top of the salary, and employee's primary Class 1 NICs, which are deducted from the salary before it reaches you. Both are calculated against weekly or monthly earnings thresholds set by HMRC. Many one-person PSCs can claim the Employment Allowance to offset employer NICs, though this allowance has restrictions — notably it is not available to companies where the director is the sole employee and also the sole shareholder in certain configurations, so check current eligibility rules rather than assuming it applies.

Dividends are entirely outside the NIC system — neither the company nor the recipient pays NICs on a dividend. This is the single biggest structural reason dividend extraction is generally cheaper than an equivalent amount of salary, and why the salary is typically kept low (just enough to secure a qualifying year towards the state pension) while dividends make up the balance.

Corporation Tax and the dividend pool

Since April 2023, Corporation Tax operates on a tiered basis: a small profits rate applies up to a lower profit threshold, a main rate applies above an upper threshold, and marginal relief smooths the transition in between. Salary paid to you (and any employer NICs on it) is deducted before Corporation Tax is calculated, while dividends can only be paid from profits after Corporation Tax has been charged. A higher effective Corporation Tax rate on your company's profit band reduces the pool available for dividends and can make a marginally larger salary more attractive.

Because the small-profits threshold, marginal-relief band, and main rate are all reviewed at each Budget, and because your PSC may have “associated companies” that affect which threshold applies, this element of the calculation should be run by your accountant using your company's actual profit figures each year.

Retaining profit vs extracting it every year

Freelance journalism income is rarely level from year to year — a book advance, a major investigation fee, or a wire-service retainer can create a spike that dwarfs a typical year. Rather than extracting every pound of profit as a dividend in the year it is earned, many PSC owners retain some profit in the company during a strong year and draw it down as dividends in a subsequent, lower-earning year, reducing the amount taxed at higher or additional dividend rates over the two years combined.

Retained profit sitting in the company is still an asset of the business, and Corporation Tax has already been paid on it before it was retained. It can be invested (subject to the company's own risk appetite and cash-flow needs) or simply held as a buffer against a lean year — itself a valuable form of income smoothing for a profession with irregular commissioning cycles.

If you are considering winding up the company altogether — for example, on taking a staff job — the tax treatment of a final distribution of retained profits (potentially as a capital distribution rather than as income, depending on the amounts involved and the winding-up route used) is a distinct area with its own rules. Take specific advice before closing a PSC with significant retained reserves.

Common mistakes journalists make

• ›Setting the same salary every year without checking whether NIC thresholds have moved — the optimal salary level is reviewed annually, not set once and forgotten.
• ›Paying a large dividend late in the tax year without checking whether it pushes total income into a higher band, when spreading it over two tax years would have reduced the overall tax rate.
• ›Adding a spouse or partner as a shareholder purely to access their unused tax bands, without ensuring the share structure and their actual involvement in the business would withstand a settlements challenge.
• ›Forgetting that dividends can only legally be paid from distributable profits — paying dividends that exceed retained profit after Corporation Tax is an unlawful distribution with its own consequences.
• ›Treating the PSC as a personal bank account and drawing funds informally, rather than through a documented salary/dividend process with board minutes and dividend vouchers.

Related guides

Primary sources

Frequently asked questions