Salary vs dividends: the tax-efficient mix for directors

As a director-shareholder you can take money out of your company two ways: as a salary (a deductible cost for the company, subject to PAYE and National Insurance) or as dividends (paid from after-tax profit, but taxed at lower rates with no NI). The art is combining them well.

Why a small salary usually comes first

A modest salary is normally worth paying because it's a tax-deductible expense for the company and it keeps you building up qualifying years towards the State Pension. Many directors set their salary around the personal allowance (£12,570) or the National Insurance threshold, so little or no Income Tax and employee NI arise on it.

Then dividends for the rest

Beyond the salary, taking profit as dividends is generally more efficient because dividend tax rates (8.75% basic, 33.75% higher, 39.35% additional) are lower than the equivalent salary rates once NI is added — and dividends carry no National Insurance. The first £500 of dividends each year is also tax-free under the dividend allowance.

A simplified example

A director needing around £50,000 might take a salary near the personal allowance and the remainder as dividends. Because the dividends are taxed at 8.75% up to the basic-rate limit rather than 20% plus NI, the total tax-and-NI take is usually lower than drawing the whole £50,000 as salary. The exact saving depends on your other income and the company's profits — which is why it's worth modelling rather than copying a rule of thumb.

Watch-outs

• You need the profit. Paying a dividend with no distributable profit is unlawful.
• Employer NI changed. The secondary (employer) NI threshold is lower than it used to be, so the “perfect” salary level shifts year to year.
• Employment Allowance. Most single-director companies can't claim it, which affects the best salary choice.
• Other income matters. Property, savings or a second job all change where your dividends fall in the bands.
• Keep the paperwork. Minutes and vouchers protect you if HMRC ever asks.

The bottom line

The salary-plus-dividends approach is well established, but the optimal split moves with the rates each year and with your personal circumstances. Get it reviewed annually — a small amount of planning typically saves far more than it costs.

This guide is general information, not personal tax advice. Rates shown are for the 2025–26 tax year and can change — ask our team about your situation.