The Tax-Efficient Combination
As a director of your own limited company, you have flexibility in how you extract profits. The most tax-efficient approach for most Amazon sellers is paying yourself a small salary (typically around the National Insurance Primary Threshold) combined with dividends from remaining profits. This combination minimises the total tax and NI paid compared to taking everything as salary.
Salary Component
Setting your salary at or just above the National Insurance Lower Earnings Limit ensures you maintain your NI contribution record (qualifying for state pension and benefits) while paying minimal or no NI and Income Tax on the salary. The exact optimal salary figure changes each tax year as thresholds are updated — your accountant will advise on the current best figure.
Dividend Component
Dividends are paid from company profits after Corporation Tax. They are taxed at lower rates than salary — the basic rate dividend tax is 8.75 percent compared to 20 percent Income Tax on salary, and there is no National Insurance on dividends. This is where the tax saving comes from. You can pay dividends up to the amount of your retained profits.
Important Rules
You can only pay dividends if the company has sufficient retained profits. Paying dividends when there are no profits is illegal (these are called unlawful dividends). You must hold a board meeting (even if you are the only director) and document the dividend declaration. Dividends must be declared and paid properly — just transferring money to your personal account without proper documentation causes problems.
Getting the Balance Right
The optimal salary-to-dividend ratio depends on your total profits, personal tax situation, and current tax rates. As profits increase, you eventually reach the higher-rate tax threshold on dividends. Your accountant should model different scenarios annually and advise on the most efficient extraction strategy. This is one of the most valuable services an accountant provides to Ltd company Amazon sellers.