Dividends, Salary And Income Protection
This page exists because it is the most common unpleasant surprise for company directors arranging income protection, and it is entirely avoidable by asking first.
The remuneration structure itself is completely standard. A modest salary, often set with tax thresholds in mind, with the rest drawn as dividends. Accountants recommend it, HMRC expects it and most small company directors are paid this way.
The complication is simply that insurance is arranged against income, and there is more than one view of what your income is.
The short answer
Many company directors take a small salary and the rest of their income as dividends, which is normal and usually tax-efficient. It matters for income protection because cover is based on income, and how a particular insurer treats dividend income varies, so a director assuming their full earnings count can find the available benefit is calculated on a much smaller figure.
What this changes
- Your salary on paper may be a small fraction of what you actually earn
- Income protection benefit is calculated from income, so the definition used matters
- How dividend income is treated varies between insurers and is not a single rule
- Cover arranged on salary alone can be far smaller than your household needs
- Executive income protection through the company is a different route worth comparing
- Changing your remuneration structure can affect cover you already hold
The bit people miss
The mistake is assuming it either definitely counts or definitely does not, because neither is reliably true. Insurers differ in how they look at dividends drawn from a company the applicant owns, and the answer can depend on how the dividends arise and how they are evidenced. What we will not do is tell you a rule that sounds authoritative and turns out not to apply to your insurer or your situation. What we can do is find out, before an application is made, what benefit is actually available to you. Doing that first is the whole point: it is a question with a findable answer, and finding it afterwards is how people end up underinsured.
Ask Before You Apply, Not After
The practical advice is simple and it is the reason this page is worth reading.
Before an application goes anywhere, the question to settle is what income figure the insurer will work from and therefore what monthly benefit is available. That is answerable in advance. It depends on the insurer, on how you are remunerated and on what you can evidence, and the combination of those is specific to you rather than general.
Getting that settled first means you find out at the start whether the cover available meets what your household actually needs. If it does not, there are other things to look at, including arranging cover through the company or using a lump sum product alongside. What you want to avoid is arranging a policy on the assumption your full income counts and finding out at claim stage that the benefit was calculated differently.
If You Change How You Pay Yourself, Say So
Remuneration structures change. Accountants revise the salary and dividend split as thresholds move, and directors move income around as the business grows or contracts.
That matters for cover you already hold, because a policy arranged against one income picture may not fit the next one. If your income rises, you may be able to increase the benefit, and some policies make that easier than others. If it falls, there is a question about whether you are paying for more cover than could actually be paid out, which is worth checking rather than discovering later.
The general principle with all insurance is that the insurer should know your circumstances, and income is a circumstance for this cover specifically. A quick conversation when the structure changes is considerably better than an assumption. The tax side of how you pay yourself is your accountant's territory and we would not comment on it; what we can do is make sure the cover follows the decision.
What usually fits, and why
The cover this question affects. Worth arranging with the income question settled in advance, so the benefit reflects what you actually earn rather than what appears on a payslip.
Arranged through the company rather than personally, which is a different route with a different structure. Worth comparing properly, because for some directors it resolves the income question more cleanly.
Pays a lump sum on diagnosis rather than a monthly benefit, so it is sized against a figure you choose rather than against your income. Useful alongside, particularly where the income protection available is limited.
Common questions
Will my dividends count towards income protection?+
It depends on the insurer and on your circumstances, and we would rather find out for you than give you a rule that may not apply. Insurers take different approaches to dividends drawn from a company you own. The important thing is to settle that question before applying rather than afterwards.
My salary is small for tax reasons. Can I still get decent cover?+
Often yes, but it needs checking rather than assuming, because the benefit available is calculated from income and the definition used varies. This is the single most common surprise for directors, and it is avoidable by asking what figure will be used before an application is made.
Is executive income protection better for directors?+
It is a different route rather than automatically better. It is arranged and paid for by the company, which suits some directors well, and the structure can handle the income question differently. Worth comparing both properly against your own situation rather than assuming either one wins.
What if the available cover is less than I need?+
Then it is worth looking at the alternatives rather than accepting the gap. That might mean arranging cover through the company, or using critical illness cover alongside, since a lump sum is sized against a figure you choose rather than calculated from income. The point is to know early enough to do something about it.
I have changed my salary and dividend split. Do I need to tell anyone?+
It is worth a conversation, yes. A policy arranged against one income picture may not suit the next one, and if your income has risen there may be scope to increase the benefit. If it has fallen, it is worth checking you are not paying for more than could be paid out.
Cover that often goes with this
The gaps we most often find sitting next to this one.