How to Pay Yourself the Smart Way: Salary vs Dividends for 2025
- Marketing Manager
- 5 days ago
- 6 min read
Running a company comes with big decisions — including how you pay yourself. And in 2025, with rising compliance expectations and business owners becoming more tax-savvy than ever, choosing between salary, dividends, or a mix of both can have a major impact on:
Your take-home pay
Your tax bill
Your superannuation
Your cash flow
Your business’s financial strength
ATO compliance
Many new business owners assume they can simply “take money out of the business when needed.” But once you operate as a Pty Ltd company, how you extract profits matters — legally, financially, and strategically.
This guide will break down everything you need to know so you can confidently choose the smartest approach for 2025.
Why Paying Yourself Correctly Matters More in 2025
The ATO has been increasing its scrutiny on:
✔ Unpaid wages
✔ Incorrect dividend distributions
✔ Directors withdrawing funds without proper classification
✔ Loans to directors disguised as payments
✔ Companies that fail Division 7A rules
Getting it wrong can trigger:
Additional taxes
Penalties
Interest
Director loan issues
Amendments to prior-year returns
Meaning: now is the time to tighten up your strategy and get it right from the start.
Option 1: Paying Yourself a Salary
Paying yourself a salary from your company works the same way as any other employee arrangement. You become both a director and an employee of your company.
How Salary Payments Work
Your company must:
Withhold PAYG tax
Pay compulsory superannuation (11% in 2025)
Pay the salary from business income
Report wages via Single Touch Payroll (STP)
Benefits of Paying Yourself a Salary
Predictable income — easier budgeting
A regular salary gives stability for mortgage applications, loan approvals, and day-to-day cash flow.
Superannuation grows your long-term wealth
Salary payments force consistent super contributions — a major advantage, especially with long-term compounding.
Reduces company profit (and tax)
Salary is deductible for the company, lowering its taxable profit.
Easier to justify to the ATO
A salary arrangement shows the director is taking income transparently, not disguising loans or unreported withdrawals.
Helps you meet personal tax obligations throughout the year
PAYG withholding prevents large end-of-year tax surprises.
Downsides of Salary Payments
Higher tax payable for high-income directors
Salary is taxed at individual tax rates, which become high past certain thresholds.
Mandatory super payments
Good for retirement — but it does add pressure to business cash flow.
Requires more administrative work
STP reporting, payroll setup, super payments, PAYG — all must be handled correctly.
Option 2: Paying Yourself Dividends
Dividends are payments made from after-tax company profits. They are not tax-deductible to the company but may offer personal tax advantages through franking credits.
How Dividends Work
Your company:
Must have retained profits
Must issue a dividend statement
Must maintain a franking account
You, the shareholder:
Receive dividends
Receive franking credits (offset personal tax)
Benefits of Paying Yourself Dividends
Potentially lower tax due to franking credits
Companies pay 25% tax (for base rate entities) — and this tax is “passed through” to you.
You may receive a refund, owe a little more, or owe nothing depending on your tax bracket.
No superannuation requirement
A dividend is not wages — you can choose if and when to contribute extra super.
Flexible timing
Dividends can be declared when cash flow is strong or when you want to manage personal tax better for the year.
No payroll admin
No PAYG, no STP reporting, no payroll compliance.
Downsides of Dividends
Limited by company profits
If your company doesn’t have profits on the books, you cannot declare dividends.
Not deductible to the company
Salary reduces company tax. Dividends do not.
Incorrect withdrawals can trigger Division 7A penalties
If you take money without proper classification and call it a dividend later, you risk significant ATO penalties.
No superannuation contributions
If you only take dividends, you miss out on compulsory super unless you contribute voluntarily.
Salary vs Dividends: Side-by-Side Comparison (Australia 2025)
Feature | Salary | Dividends |
Tax paid | Individual tax rates | Personal tax minus franking credits |
Superannuation | Required 11% | Optional |
Company deduction | Yes | No |
Admin workload | High | Low |
Can take anytime? | Yes | Only if company has profits |
Cash flow impact | Higher (super + PAYG) | Lower |
ATO scrutiny | Low | Medium-High |
Ideal for | Consistency, long-term wealth | Flexibility, tax planning, profit extraction |
The Smartest Payment Strategy for 2025: A Combination Approach
Most accountants — including us — recommend a hybrid approach:
1. Pay yourself a reasonable salary
Enough to:
Support your lifestyle
Build super
Keep the ATO happy
Maintain clean payroll records
2. Take dividends strategically
Ideal for:
Profit extraction
Tax minimisation
End-of-year top-ups
Cash flow balancing
This combination gives:
✔ Reliable income
✔ Lower company tax
✔ Lower personal tax
✔ Healthier super
✔ More strategic control
What Is a “Reasonable Salary” for Directors?
The ATO does not specify an exact dollar amount, but a “reasonable salary” should:
Reflect your role
Reflect what you'd pay someone else doing your job
Reflect your business size and revenue
Example:
A director actively working full-time in the business should NOT take $10k salary and $150k dividends.
A director working minimal hours or consulting part-time could justify a lower salary.
2025 ATO Compliance Updates You Need to Know
1. Division 7A Crackdowns
If you withdraw money without classifying it correctly, it could be considered a director loan — which must be repaid with interest or converted to a compliant loan agreement.
2. Increased STP Monitoring
Incorrect or late payroll reporting is tracked in real time.
3. Franking Account Balance Must Be Accurate
Incorrect calculations may create tax liabilities or penalties for the company.
4. ATO Matching Across Databases
The ATO now cross-checks:
Bank transactions
Payroll lodgements
Dividends reported
BAS
Tax returns
Meaning: transparent, compliant payment methods are safer than ever.
How to Decide the Best Payment Method for YOU
Here’s a simple way to determine the smartest approach:
Choose SALARY if:
You need stable income
You want to build super
You're applying for loans
You want to reduce business tax
You work full-time in the business
Choose DIVIDENDS if:
You want flexible income
You want to use franking credits to lower your tax
You want to extract profits tax-efficiently
Your company has strong retained profits
Choose BOTH if:
➡️ You want the perfect balance
➡️ You want optimised tax
➡️ You want long-term financial security
➡️ You want to stay ATO-compliant
(Spoiler: this is almost always the best strategy.)
Example Strategies for Real Australian Business Owners
Scenario 1: Growing Company With Consistent Revenue
Salary: $80,000
Super: $8,800
Dividend: Declared at EOFY based on profit
Result: predictable income + tax-efficient profit distribution.
Scenario 2: High-Profit Consulting Business
Salary: $60,000
Dividend: Large top-up based on profits
Optional super contributions
Result: flexibility + maximum use of franking credits.
Scenario 3: Cash-Flow-Tight Startup
Small salary
No dividends until profitable
Keep cash in the business
Result: sustainability + compliance.
What NOT To Do in 2025
🚫 Take random cash from the business account
🚫 Pay personal bills directly from the company without classification
🚫 Pay zero super (ATO flags this instantly)
🚫 Declare dividends when no retained profits exist
🚫 Use dividends to avoid paying a reasonable salary
These are the behaviours the ATO is actively targeting — and they can create major tax complications.
How ProfitCloud Helps You Pay Yourself the Smart Way
We help Australian business owners:
✔ Choose the most tax-efficient payment mix
✔ Set up proper payroll and STP
✔ Plan dividend distributions
✔ Avoid Division 7A penalties
✔ Forecast cash flow for the year
✔ Strengthen personal wealth and business growth
If you're unsure which option is best for your structure, we can help you review your setup and guide you toward the smartest, most compliant choice.
Conclusion: Paying Yourself Smart in 2025 Starts With Strategy
Salary and dividends are powerful tools — but only when used intentionally.
A salary gives stability. Dividends give tax efficiency. Together, they give you financial control.
2025 is the perfect year to structure your director income the right way, improve compliance, and set your business up for stronger growth.
Want a personalised salary vs dividend plan?
Book a free review with us — we’ll assess:
Your business structure
Your current tax position
Your goals
Your cash flow
Your compliance setup
And show you the smartest way to pay yourself this year.
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