As a dental practice owner, deciding how to pay yourself is one of the most important financial decisions you'll make. Get it wrong, and you could be paying thousands more in tax than necessary. Get it right, and you'll maximise your take-home pay while staying compliant with HMRC.

Most dental practice owners operate through limited companies, which gives you two main options: salary and dividends. The optimal approach typically involves a combination of both, but the exact split depends on your circumstances.

Salary vs Dividend: The Basics

When you pay yourself a salary, your practice treats it as a business expense. You and the company pay National Insurance, and you pay income tax through PAYE. It's straightforward but can be expensive.

Dividends come from company profits after corporation tax. There's no National Insurance on dividends, but you pay dividend tax at different rates depending on your total income. This is often where the tax savings lie.

Current Tax Rates (2024/25)

  • Corporation tax: 19% on profits up to £50,000, then 25%
  • Dividend tax: 8.75% (basic rate), 33.75% (higher rate), 39.35% (additional rate)
  • National Insurance: 12% employee, 13.8% employer on salaries above £12,570

The Optimal Salary Strategy

Most dental practice owners pay themselves a salary at the National Insurance threshold (£12,570 for 2024/25). This preserves your National Insurance record for state pension purposes without triggering NI contributions.

Some prefer paying up to the personal allowance (also £12,570), while others go slightly higher to maximise pension contributions. The key is finding the sweet spot for your situation.

Dividend Extraction Strategy

After paying your optimal salary, dividends become your main profit extraction method. The beauty of dividends is the lack of National Insurance, but remember they come from post-corporation tax profits.

For 2024/25, you get a £500 dividend allowance before paying dividend tax. Beyond that, you'll pay 8.75% on basic rate amounts, rising to 33.75% if you're a higher rate taxpayer.

Example: Practice Owner Earning £100k

  • Salary: £12,570 (no tax or NI)
  • Remaining extraction: £87,430 via dividends
  • Corporation tax on dividends: £16,612 (19%)
  • Net dividend available: £70,818
  • Dividend tax payable: £5,653
  • Total take-home: £77,735

Compare this to taking the full £100k as salary, where you'd pay roughly £27,000 in combined tax and National Insurance contributions.

Timing Your Profit Extraction

Unlike associates who receive regular payments, practice owners control when they extract profits. This flexibility offers significant advantages for tax planning.

Consider spreading dividend payments across tax years if you're near the higher rate threshold. Taking £45,000 in March and £45,000 in April might keep you in the basic rate band both years, rather than pushing into higher rate tax.

Pension Contributions and Owner Pay

Your salary level directly affects pension contribution limits. With a £12,570 salary, you can typically contribute around £3,600 annually into a pension with tax relief.

Higher salaries unlock larger pension contributions but trigger National Insurance. Many practice owners increase their salary temporarily when making significant pension contributions, then revert to the lower level.

IR35 and Practice Owners

If you work in your own practice, IR35 typically doesn't apply. However, if you do locum work or contract with other practices while operating your limited company, IR35 rules might affect how you can pay yourself from that income.

The key test is whether you'd be considered an employee if the contract were directly with you personally. Most genuine practice owners pass this test easily.

Multiple Income Streams

Many practice owners have complex income situations. You might have NHS contract income, private income, property investments, or mixed NHS and private work. Each affects your optimal pay strategy.

Higher total income pushes you into higher tax bands sooner, making dividend extraction even more valuable. It's worth reviewing your strategy annually as your income grows.

Common Mistakes to Avoid

Don't treat your business account as a personal account. All payments to yourself must be properly documented as either salary or dividends. HMRC takes a dim view of informal drawings.

Avoid paying dividends when your company lacks sufficient profits. This creates illegal distributions that HMRC can treat as salary, complete with tax and National Insurance implications.

Remember that dividend payments need board resolutions and proper documentation. It's not just transferring money between accounts.

When to Seek Professional Advice

Your optimal pay strategy depends on numerous factors: total income, family circumstances, pension goals, and future business plans. What works for a single-practice owner earning £80k differs significantly from a multi-site owner extracting £300k annually.

Consider professional advice if you're approaching higher rate tax bands, planning significant pension contributions, or dealing with multiple income sources. The potential savings usually dwarf the advice costs.

Annual reviews make sense as tax rates, allowances, and your circumstances change. What's optimal this year might not be next year.