The corporation tax rate is 20%. Both salary and pension contributions paid out by the company are tax allowable. So for instance, for each £100 paid out by the company in pension contributions, it saves £20 corporation tax. Corporation tax is not paid on dividends – it is paid on company profits.
With regards to your personal tax position your overall gross personal income i.e. including salary and dividends needs to be a maximum of £41,865 in the current tax year – otherwise you pay income tax on the excess of dividends taken over this threshold at the rate of 25%.
So for instance, the maximum amount of net dividends to take before you pay tax if your only other income is salary at £7,956 (£663 per month) is £30,518 net (i.e. what you actually take). Any more dividends above this will incur tax at the rate of 25% on the net dividend taken.
So, for example, if you take £50k net dividends with £7,956 salary then you would pay (£50,000 – £30,518 = £19,482 x 25% =) £4,870.50 income tax. You can take more dividends without paying income tax if you personally pay into a personal pension plan as such contributions attract tax relief. If, however, you are a Higher Rate Tax payer (i.e. total gross earnings are over £41,865) it’s better to have your company pay into a scheme for you as opposed to making personal contributions. A company scheme can be set up by your IFA.
From Graeme Bennett of Forbes Young