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Salary & Dividends

NOTE: This article still contains 2010-11 data. The numbers have changed for 2011-12. We will be updating it from 6th April 2011.

Every shareholder/director can earn £42475 and pay no tax.

If nothing else, for those new to the world of being an owner/ director of their own company this is seen as a revelation and almost miraculous, “too good to be true”. And we all know that if something seems too good to be true it probably is. Well this IS true but the headline doesn’t tell the whole story.

This particular article is going to:

Expose the real truth behind “£42475* and no tax”

and in Part 2 which you'll find here:

Tell you HOW to do it, and

Why 2 Hats are better than 1

It is possible to earn £42475* and pay no tax

This particular pay strategy is based on three basic facts:


  1. Everyone is entitled to receive the first £7225 of income free of Income Tax and National Insurance (NI) (technically the rate of NI payable is 0%).
  2. Provided you pay tax only at the basic rate, dividends are treated as tax paid.
  3. You have no other income or benefits in kind.


Let’s deal with each of these three fundamentals in turn.

The first £7225 of earnings is free from Income Tax and NI.

For the moment, if you earn less than £102 per week you are not treated as earning NI credits (unless you qualify for them in some other way). When your earnings reach £138 per week you pay NI at the normal rate of 12%. The gap in between is an oddity – the rate of NI is 0% and so you can choose to earn between those two amounts and while you will earn NI Credits, you will not pay NI and neither will the employer.

You can choose to pay up to £143.75 per week and pay no tax (providing your tax code is 747L or higher) but you will pay a small amount of NI. The NI/ Tax gap arose when Gordon Brown messed with the 10% rate a couple of years back and it has never been fixed since.

You need to get advice if:

Your tax code is not 747L as it may change some of these numbers

Dividends are treated as tax paid

This is where our first tricky problem arises.

Suppose you decide to pay yourself £135 per week as salary and the remainder of your money as dividends. The unguided and untutored might think, "This is easy."

Total tax free £42475

Less Salary £ 7020

Dividends £35455 which equates to about £681 per week.


They would however now be paying higher rate tax, which on dividends works out at 32.5%. Here’s why...

The clue is in the original statement, dividends are treated as having had tax paid on them at source, and so what you receive as a dividend is after tax. The income limit (£44000) is BEFORE tax so we need to do a small calculation first. If you want a copy of our dividend calculator tool, use the form at the bottom of this page.

Total tax free £42475

Less Salary £ 7020

Maximum Gross Dividends £35455

To work out net dividends we do a simple calculation:

£35455 x 90%

This works out at £31909 or £613 per week

You have no other income.

If you have other income you will need to add it to the calculation before working out what the maximum dividend is you can have. Our dividend calculator tool reminds you to take this into account.

Read more in Part 2 - How to do it


If you need help with any of the stuff on this page or want the calculator sent to you, just complete the form below

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