Salary or dividends? Start with company capacity, then calculate the owner’s full position.

1. Establish what the company can lawfully and safely pay

Begin with current management accounts, not the bank balance. A dividend requires distributable reserves at the time it is approved, while salary and bonuses need payroll, cash and company-tax analysis.

• Reconcile year-to-date profit, retained losses, tax and significant post-balance-sheet movements.
• Reserve cash for working capital, PAYE, corporation tax, debt and committed investment.
• Check the rights attached to each share class and document the dividend decision and voucher.

2. Compare the company-side cost

Salary and employer pension contributions may be deductible when incurred wholly and exclusively for the trade and accounted for correctly. Dividends are paid from post-corporation-tax profits and do not create a corporation-tax deduction.

Employer National Insurance, Employment Allowance eligibility, payroll timing and the accounting period of deduction all affect the comparison. Benefits and reimbursed expenses should be analysed separately rather than hidden inside a salary-versus-dividend table.

3. Model the owner’s entire tax year

Add employment income, dividends, rent, savings, benefits, gains and pension inputs. Then calculate adjusted net income and the effect on allowances, benefit charges and payments on account.

A second shareholder may have a different answer even with identical shares because their other income and cash needs differ. Any dividend must still follow genuine legal rights rather than being allocated retrospectively to the person with the lowest tax rate.

4. Put pensions and deferred access on the same page

An employer pension contribution can move value out of the company without current personal access, subject to company deduction rules and the individual’s annual allowance. It is therefore not a direct substitute for cash needed now.

• Obtain pension input values, including defined-benefit growth and all employer contributions.
• Check tapering and carry-forward conditions from earlier years.
• Use an authorised financial adviser for product, investment and retirement suitability.

5. Reconcile director’s loans before using future income

Drawings without salary, expense or dividend treatment usually sit on the director’s loan account. An overdrawn balance can create a company tax charge, interest and benefit consequences, depending on amount and timing.

Do not assume that a future dividend will automatically repair the history. Establish when each amount was drawn, which approvals existed and whether repayments or re-borrowing fall within anti-avoidance rules.

6. Document the route selected

A robust extraction file includes the management accounts supporting reserves, cash forecast, payroll records, board minutes, dividend vouchers, pension evidence and director-loan reconciliation.

Review the plan before both the company year end and 5 April. Those dates control different taxes and can create different opportunities or deadlines.

Worked comparison: cash does not establish dividend capacity

Hypothetical example: a private trading company has £90,000 in its bank account. Its accounts show £50,000 accumulated realised profits brought forward, a £30,000 current-period loss after appropriate tax provisions and £10,000 dividends already paid. Assuming no other adjustments, only £10,000 remains available for distribution: £50,000 less £30,000 less £10,000.

A proposed £25,000 dividend therefore exceeds this illustrative capacity by £15,000, despite the cash balance. If the forecast also reserves £85,000 for liabilities and essential working capital, only £5,000 is available on that cash assumption. The reserves test and commercial cash test answer different questions; neither is a substitute for reviewing the actual accounts and solvency position. These figures illustrate arithmetic, not a client case or an approved dividend.

Which accounts support the decision?

Companies Act 2006 section 830 limits distributions to accumulated realised profits less accumulated realised losses, subject to the statutory rules. Section 836 requires reference to relevant accounts. HMRC explains the distinction between annual, interim and initial accounts and the need to account for earlier distributions. Shareholders cannot simply waive the legal requirement.

For an established private company, reconcile the last annual accounts to current results before deciding whether interim accounts are needed. Include impairment, bad debts, depreciation, accruals and appropriate tax provisions. An unrealised property revaluation should not simply be counted as distributable profit. Management accounts help identify the position but need sufficient accounting work to support the particular decision.

Approve, record and pay in the correct sequence

Confirm share rights and the company’s articles, establish supportable reserves and cash, model company and personal tax, then obtain the appropriate approvals and retain minutes and vouchers. Distinguish interim and final dividends: HMRC guidance explains that a final dividend can become due under its resolution, while an interim dividend generally becomes due on payment. A credit made freely available on a shareholder loan account can be payment even without a bank transfer. The timing must follow what actually happened, not a preferred tax year.

Do not backdate documents or assume later profits cure an unsupported earlier withdrawal. Review historic drawings, director-loan consequences and any repayment or re-borrowing separately. Changing share rights, waiving dividends or routing payments to family members requires bespoke legal and tax analysis.

Use regular accounts and tax support to keep the evidence current and profit extraction advice to evaluate the full position. Book a Tax Consultation before committing to a material withdrawal. Law and HMRC guidance for this expanded decision framework checked on 4 November 2026; the illustration assumes an ordinary UK private trading company.

Official sources and further reading

These primary sources support the framework above. Check the current version before acting because tax law and HMRC guidance can change.

• Companies Act 2006 section 830
• HMRC distributions and relevant accounts
• GOV.UK taking money from a company
• HMRC dividend timing