Dividend payout advantages drain away for small-business owners
Life is getting harder for self-employed people and small business owners paying themselves through dividends rather than a salary”


The government’s announcement of new tax charges to pay for the cost of social care could be another nail in the coffin for the practice of self-employed people and small-business owners paying themselves through dividends rather than a salary. While the dividend option has long been the preferred route for many self-employed workers, its advantages have been steadily eroded in recent years.
At first sight, dividend tax rates still look advantageous. From next year, basic-, higher- and additional-rate taxpayers will pay 8.75%, 33.75% and 39.35% respectively on dividends they pay themselves from their businesses, a 1.25% increase compared with today. This simply matches the 1.25% increase in national-insurance contributions for taxpayers who receive a salary.
Bear in mind, however, that your business will also have to pay employers’ national insurance, which is increasing by 1.25%. So self-employed workers who have set up companies will effectively have to pay the social-care charge twice over if they are also paying themselves even a very small salary – as most do, in order to qualify for state pension rights, for example.
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Moreover, while income-tax rates are staying at 20%, 40% and 45% respectively under the new system – and there are no employee national-insurance contributions to pay on dividends – the comparison with dividend-tax rates is misleading. In practice, dividends must be paid out of company profits after the business has paid its corporation tax, so you need to take this tax into account too when comparing the two regimes.
Chancellor Rishi Sunak’s attitude towards self-employed people paying themselves through dividends is becoming increasingly clear. His move to make absolutely sure that the self-employed pay more to cover social-care costs follows his controversial decision to exclude many small business owners from the generous financial support offered to most people during the Covid-19 crisis.
Some 700,000 small business owners who pay themselves through dividends missed out on the vast majority of assistance made available through initiatives such as the self-employment income support scheme (SEISS).
The government’s direction of travel is also revealed by its changing policy on the dividend allowance – the amount of dividends you can earn each year with no income tax to pay. This was set at £5,000 in 2016, but reduced to £2,000 in 2018, where it has remained ever since.
In other words, the state has consistently looked to self-employed workers paid through dividends as a source of additional tax income. Indeed, tax rates on dividends were also increased only five years ago.
At the same time, the Treasury has resisted calls to ensure this group of taxpayers receives the same benefits as other people. The valuable Covid-19 support they missed out on is only part of that story. The self-employed also have to pay costs such as retirement saving and sick pay themselves.
In which case, many more self-employed workers will now be questioning whether it continues to make sense to choose the dividends route. If you are comparing only the tax benefits of dividends versus a salary, the sums will depend on your personal circumstances, but look increasingly finely balanced. But take into account broader issues too, including what might happen in a crisis.

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.
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