Director salary vs dividends: how to pay yourself

Salary and dividends are taxed completely differently. Salary is an employment cost: it reduces the company’s Corporation Tax, but attracts income tax and — above the thresholds — employee and employer National Insurance. Dividends are a share of profit: no National Insurance at all and lower headline tax rates, but they’re paid from profit that has already suffered Corporation Tax and they don’t reduce it. The efficient answer for most owner-managed companies is a blend: enough salary to secure the benefits only salary gives, dividends for the rest.

• Personal allowance: £12,570 (frozen)
• Employer NI: 15% on salary above £5,000 (the secondary threshold)
• Employee NI: 8% on salary above £12,570
• Dividend allowance: £500
• Dividend tax: 10.75% basic rate / 35.75% higher rate / 39.35% additional rate from April 2026 (each ordinary rate up 2 percentage points at the Autumn 2025 Budget)
• Corporation Tax: 19% on profits up to £50,000, 25% over £250,000, marginal relief between
• Employment Allowance: up to £10,500 off employer NI — but not available where the only person on the payroll is a single director

The classic choice is a salary of £12,570 (uses the full personal allowance; the employer NI on the slice above £5,000 is itself deductible) or £5,000 (no NI at all, but wastes some personal allowance). Which wins depends on whether the Employment Allowance is available and your company’s Corporation Tax rate — this is a calculation, not folklore.

How the Corporation Tax bands affect the answer →

• Distributable profits only. Dividends come from retained post-tax profit. If the reserves aren’t there, the dividend is unlawful — even if there’s cash in the bank.
• Paperwork every time. Board minute plus dividend voucher, dated, for every payment. HMRC asks for these in enquiries.
• Proportional to shareholdings. Dividends follow share rights — you can’t simply pay shareholders different amounts per share of the same class.
• Regular round-sum drawings aren’t dividends. Taking money ad hoc and calling it dividends later risks the lot being treated as a director’s loan — with its own tax charge if not repaid on time.

Employer pension contributions are often the most efficient extraction of all: fully deductible for Corporation Tax, no NI, no income tax now (taxed when drawn, usually with 25% tax-free). For directors who don’t need every pound as income today, a blend of small salary + dividends + employer pension usually beats either pure strategy.

We review salary/dividend splits as part of preparing company accounts and director tax returns — before year end, while there’s still time to change course. Call 0114 327 1480.

Director Self Assessment service →