Salary or dividends for a US founder of a UK company

Why does the usual UK salary and dividend split need re-testing

The usual split is designed around one tax system. It works in the UK because dividends carry no National Insurance and are taxed at lower rates than salary. A US citizen files a second return that ignores those reasons, taxes company profit on its own timetable and restricts how UK tax is credited.

A UK-only director commonly takes a small salary, set at a level that protects a State Pension record without much National Insurance, and draws the remainder as dividends when the company has profits to distribute. Profit that is not needed can stay in the company, where the only tax so far is corporation tax. Each of those steps is sound under UK law, and none of them was designed with a US shareholder in mind.

For a US founder the same plan has weak points, and each one is a difference in how the United States classifies or times the income. None of them makes dividends wrong in every case. They mean that the saving shown in a UK-only calculation can be reduced, or reversed, once the US return for the same year is prepared.

• Profit kept in the company can be taxed on the US owner in the year it is earned, under the controlled foreign corporation rules.
• Salary and dividends sit in different foreign tax credit categories, so spare UK tax on one cannot be set against US tax on the other.
• Dividends can attract the net investment income tax at 3.8%, which is generally not creditable under domestic law, and treaty-based claims are contested.
• The foreign earned income exclusion can apply to salary and never to dividends.

How does the UK tax salary and dividends from your own company

Salary is deducted before Corporation Tax (opens the official GOV.UK page in a new tab) is worked out and bears income tax and National Insurance through PAYE. Dividends are paid from profit that has already borne corporation tax at 19%, at 25% or at an effective rate in between, and are then taxed on the shareholder at dividend rates.

The 19% small profits rate applies to a company whose profits are under the lower limit, and the 25% main rate applies above the upper limit, with marginal relief in between. The limits are shared between associated companies. Salary and employer National Insurance both reduce the profit on which the company pays that tax. The company runs PAYE as an employer (opens the official GOV.UK page in a new tab) even where the director is its only employee, which our payroll services team operates for owner-managed companies.

A dividend needs distributable profit and proper paperwork. The shareholder has a small dividend allowance, and dividends above it are treated as the top slice of income and taxed at a rate set by the band they fall in. Those rates are below the rates on salary, although the basic and higher rate tax on dividends (opens the official GOV.UK page in a new tab) rose from 6 April 2026, which narrowed the gap. No National Insurance is due on a dividend.

How does the US tax salary and dividends from a UK company

Salary for work done in the UK is foreign earned income on the US return. It can be relieved by the foreign tax credit or by the foreign earned income exclusion. A dividend is investment income: the exclusion cannot apply to it, and credit for UK tax on it is computed in a separate category.

UK income tax on salary is usually higher than the US tax on the same pay, so a credit claimed on Form 1116 often gives the better result and leaves unused credits that can be carried back one year and forward ten. The exclusion on Form 2555 covers up to $130,000 of earnings for tax year 2025, and revoking it bars a fresh election for five years without IRS consent. Our article on the foreign tax credit or the exclusion in the UK compares the two.

A dividend from a foreign company can be taxed at the lower US rates for qualified dividends where the company is eligible for the benefits of the US-UK income tax treaty (opens the official IRS page in a new tab), the shares have been held for the required period and the company is not a passive foreign investment company for the year. A trading company owned and run from the UK will often meet those conditions, but they are tested each year, and a company holding mainly cash or investments may fail the last one.

Can the US tax profit that stays in the company

Yes. A UK company wholly owned by a US citizen is a controlled foreign corporation, and its owner can be taxed each year on a share of profit the company has kept. Declaring no dividend defers UK tax on the shareholder. It does not defer US tax in the same way.

Two regimes do this. Subpart F reaches mainly passive income, such as interest, rents and royalties, together with some sales and services income earned through related parties. Most remaining profit falls within net CFC tested income, formerly GILTI, computed on Form 8992 (opens the official IRS page in a new tab). It applies to ordinary trading profit and has no minimum size. An individual does not by default receive the deduction or the credit for UK corporation tax that a US corporate shareholder receives.

Salary reduces the company's profit and so reduces the amount exposed to either regime, at the price of National Insurance. A section 962 election and the high-tax exception are options to review with the figures for the year, and neither is automatic. The inclusion is reported through Form 5471, which our article on Form 5471 for a one-person UK limited company explains.

Why UK tax does not always cover US tax on a dividend

The foreign tax credit is limited category by category. Salary falls in the general category and dividends in the passive category, so UK income tax paid on salary cannot reduce US tax on a dividend. Where UK tax on the dividend itself is low, US tax can remain payable.

That happens more often than founders expect. A dividend that falls within the personal allowance, the dividend allowance or the basic rate band bears little UK tax, while the US taxes it from the first dollar once other income has used the standard deduction. The spare credits generated by a highly taxed salary sit unused in a different category. The foreign tax credit (opens the official IRS page in a new tab) rules allow carryovers within a category, not transfers between categories.

Company-level tax adds a further layer. Corporation tax is the company's liability, not the shareholder's, so an individual gets no credit for it against US tax on a dividend. An inclusion under net CFC tested income has a category of its own. A later dividend of profit already taxed in the US under those rules is generally not taxed again as income, yet the UK still charges dividend tax on it, which leaves UK tax with no matching US income in that year.

Are employer pension contributions a third route

They can be. A contribution paid by the company into a UK registered pension scheme is generally deductible for corporation tax, carries no National Insurance and is not taxed on the director within the UK allowances. The US treatment depends on the treaty and has to be claimed with care.

On the UK side the contribution must be made wholly and exclusively for the purposes of the trade, and the annual limits on tax relief for pension contributions (opens the official GOV.UK page in a new tab) apply to the director. On the US side, growth inside a UK pension scheme is generally protected from current US tax for a US citizen resident in the UK. Relief for contributions is narrower: it is capped by reference to the relief a comparable US plan would receive, and it is limited by the saving clause, which lets the US tax its citizens as if the treaty did not exist, subject to listed exceptions.

A treaty position is disclosed on Form 8833. Whether a company contribution also reduces profit as measured under US rules needs checking, because the US has its own conditions for deducting payments to a pension plan. Our US-UK pensions service reviews the scheme and the contribution level before the payment is made.

How should a US founder decide the split each year

There is no single correct split. The answer depends on the company's profit, the founder's other income, whether profit is needed in the business and which elections are in place. It should be modelled on the UK return and the US return together before the company's year ends.

Social security is one point that is simpler than founders fear. US self-employment tax, charged at 15.3%, applies to self-employment earnings and not to salary paid by a company that the US treats as a corporation. Under the totalization agreement (opens the official SSA page in a new tab), an employee working in the UK for a UK employer is generally covered by UK National Insurance alone. The position differs if the company has been elected into disregarded status.

Take a US citizen living in Bristol who owns every share of a UK software consultancy. Paid mostly by salary, she pays more National Insurance, the company keeps little profit, and UK income tax usually covers the US tax on her pay. Paid mostly by dividends, she saves National Insurance, but the profit funding the dividends is measured under the US company rules and the dividends need their own credit. Neither result is known until both returns are drafted.

The points below go into that model, and most of them change from one year to the next, so last year's answer is only a starting point. Our CFO advisory and business tax returns services run it against the company's forecast, and the founders, fund managers and executives guide sets out the entity election that changes the whole calculation.

• Forecast profit before and after salary, and where it falls between the corporation tax limits
• Foreign tax credit carryovers already held in each category
• Whether the foreign earned income exclusion is in force or has been revoked
• Profit the business needs to retain, and for how long
• Any section 962 election, high-tax exception or entity election under review