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Dividends vs Salary: The Director's Tax Question
How limited company directors split pay between salary and dividends for 2025/26 — rates, allowances, NI implications and a sensible default mix.
Quick answers
Should I take a salary or dividends as a director?
Most owner-directors take a small salary up to the personal allowance (£12,570 in 2025/26) plus dividends to top up. This combines a Corporation Tax deduction on the salary with the lower personal tax rate and zero National Insurance on dividends.
How much tax do I pay on dividends?
After the £500 dividend allowance, dividends are taxed at 8.75% in the basic-rate band, 33.75% in the higher-rate band and 39.35% in the additional-rate band. There's no National Insurance on dividends.
Do dividends save Corporation Tax?
No. Dividends are paid from profits after Corporation Tax has been charged. Salary, by contrast, is a deductible business expense that reduces taxable profit and therefore the Corporation Tax bill.
Dividends vs Salary
Limited company directors can take income as salary, dividends, or both. The right mix balances Corporation Tax relief, personal Income Tax, National Insurance and State Pension entitlement.
How each is taxed (2025/26)
Salary
- Reduces company profits → saves Corporation Tax (19% or 25%).
- Personal Income Tax: 0% / 20% / 40% / 45% in the usual bands.
- Employee NI: 8% above £12,570; 2% above £50,270.
- Employer NI: 15% above £5,000.
Dividends
- Paid out of post-tax profits → no Corporation Tax saving.
- £500 dividend allowance (taxed at 0%).
- Then 8.75% basic / 33.75% higher / 39.35% additional rate.
- No National Insurance.
Sensible default for a single-director company
Most owner-directors take a small salary plus dividends:
- Salary at the personal allowance (£12,570/year) — tax-free for the individual, fully deductible for the company. Some take a slightly lower salary (e.g. just above £6,500 LEL) to avoid employer NI, depending on Employment Allowance eligibility.
- Dividends to top up to the chosen income level.
This is more tax-efficient than a large salary because dividends avoid NI, but you'll always pay personal tax on dividends above the £500 allowance.
When salary may be better
- You want to maximise pension contributions (only relevant earnings count).
- You need to build NI credits for State Pension.
- The company doesn't have profits to pay dividends from.
- You want to claim certain benefits linked to earnings (mortgage, maternity).
When dividends may be better
- The company has distributable reserves (post-tax profits not yet paid out).
- You're already past the personal allowance.
- You're not relying on the salary for benefits or pension.
Important rules
- Dividends can only be paid from distributable profits — illegal dividends can be reclaimed.
- Each dividend needs board minutes and a dividend voucher.
- Dividends are not a deductible expense for the company.
This is general guidance for the 2025/26 UK tax year and is not personal tax advice. Always check the latest figures on GOV.UK or speak to a qualified accountant for your situation.
Frequently asked questions
Related guides
Example: Optimal Salary and Dividend Split for a Director
A 2025/26 worked example showing a small limited company director's tax bill at different salary/dividend mixes.
Corporation Tax Explained: Rates, Computation and CT600 Filing
How Corporation Tax works for UK limited companies in 2025/26 — rates, marginal relief, what to deduct, and how to file your CT600.
Reference: UK Tax Rates 2025/26
All the headline UK tax rates and bands for 2025/26 in one place — Income Tax, NI, Corporation Tax, VAT, dividends, CGT.