In a small company, it is often significantly advantageous for the owner to extract their money with a a small salary of say £5000 and the balance in dividends. The small salary is used to use up their personal allowance and give them credit for national insurance purposes without actually paying any NI, whilst the dividends avoid the significant employee and employer NI costs of salaries. Many thousands are saved every year with this strategy.

So, is it allowed?

The answer is that if there is no written contract of employment, HMRC cannot enforce the minimum wage in this situation between a director and their company.

There is no need for a director to pay themselves the market value of their salary because there is no such thing under the Tax legislation. The directors can vote whatever level of remuneration that they want to.

So when dividends are paid, they are paid because the director is a shareholder and not because of any employment situation. However much HMRC may not like this, they are stuck with it unless the law is changed.

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