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Should You Pay Yourself Through Salary or Dividends? A Director’s Guide to Efficient Remuneration

If you’re a director of your own limited company, you’ve likely asked yourself this question more than once:
Should I pay myself a salary, dividends – or a mix of both?

With ever-changing tax rules, national insurance thresholds, and dividend tax rates, choosing the most tax-efficient method of taking money out of your company is both a financial and strategic decision.

In this article, we explore the pros and cons of paying yourself through salary vs. dividends in the 2025/26 tax year, with practical examples to help you optimise your remuneration strategy.

Understanding the Basics

Let’s start with what each method means:

1. Salary

A salary is paid through PAYE (Pay As You Earn). As with any employment income, this means:

  • Income tax is deducted at source
  • National Insurance Contributions (NICs) apply (both employee and employer)
  • It’s a tax-deductible expense for the company

2. Dividends

Dividends are payments made from a company’s post-tax profits. They:

  • Do not incur NICs
  • Are taxed at the dividend tax rates
  • Are not deductible from corporation tax

To pay a dividend, your company must have available retained profits and follow the correct legal process (board minutes, dividend vouchers, etc.).

What’s Changed for 2025/26?

Before we compare the two methods, here’s what’s new this tax year:

  • Dividend Allowance has dropped from £1,000 to just £500
  • Dividend Tax Rates remain at:
  • 8.75% (basic rate)
  • 33.75% (higher rate)
  • 39.35% (additional rate)
  • Personal Allowance remains at £12,570
  • National Insurance (Employer’s) rate is now 15%
  • Employment Allowance is now £10,500 (for eligible employers)

All of these directly affect how tax-efficient salary or dividends may be for you.

Option 1: Paying Yourself a Salary

Paying a low salary can be smart, especially if:

  • You want to build up qualifying years for your State Pension
  • Your company is eligible for the Employment Allowance
  • You want to make pension contributions or apply for a mortgage

🔍 Example:

If you pay yourself a salary of £12,570 (the Personal Allowance), there will be:

  • No income tax
  • No employee NICs
  • Small employer NICs, unless covered by Employment Allowance
  • Full tax relief for the company

This is often considered the “optimal salary” level for many directors.

Option 2: Paying Yourself Dividends

Dividends can be significantly more tax-efficient once the Personal Allowance is used up.

Since they are not subject to NICs, they reduce the overall tax burden. However:

  • You can only pay dividends out of retained profits
  • You must declare them properly via board resolution and dividend voucher
  • You’ll pay dividend tax on anything above your allowances

🔍 Example:

Let’s say you’ve paid yourself £12,570 salary and take £20,000 in dividends:

  • First £500 of dividends = tax-free allowance
  • Next £19,500 = taxed at 8.75% = £1,706.25

Total tax bill: £1,706.25 on £32,570 total income (effective rate: ~5.24%)

Compare that to someone who earns £32,570 through PAYE only — they’ll pay significantly more tax and NICs.

So, What’s the Best Approach?

Most directors benefit from a blended approach:

  • Pay yourself a salary up to the Personal Allowance (usually £12,570)
  • Top up with dividends up to the basic rate band if possible (up to £50,270 total income)
  • Avoid higher-rate tax if not necessary
  • Use the company’s retained profits strategically

Other Considerations

✅ Pension Contributions

Only “relevant earnings” (e.g., salary, not dividends) can support tax-relieved personal pension contributions. If you’re planning to invest in pensions, you’ll want at least some salary.

✅ Mortgages and Loan Applications

Lenders often favour salary + dividend income over pure dividends. Keep this in mind if you’re planning to borrow.

✅ Employer NICs vs. Employment Allowance

If your company has more than one employee and is eligible for Employment Allowance, the employer NICs on your salary may be completely wiped out — making salary more attractive.

✅ Future Tax Increases

Dividend tax rates have been increasing in recent years. Keeping an eye on future Budgets is crucial. Locking in dividends now may be wise in some circumstances.

What About Bonuses?

Bonuses are taxed the same as salary and subject to NICs.
Sometimes, however, they may be useful where you:

  • Want to make company-wide payments
  • Need to create a bigger pensionable income
  • Want to reduce the company’s corporation tax bill

Conclusion: Salary, Dividends — or Both?

There’s no “one size fits all” answer — the most efficient remuneration plan depends on your:

  • Profit levels
  • Personal tax position
  • Cashflow needs
  • Company structure

In most cases, a low salary + dividend top-up remains the most tax-efficient strategy in 2025/26 — but this needs to be reviewed regularly in line with changing tax rules.

✅ Need Help Optimising Your Director Remuneration?

At Merranti Accounting, we work with directors and business owners every day to help structure tax-efficient strategies that support your long-term goals.

Whether you need help calculating the optimal mix, or you’re planning ahead for retirement, succession, or investment — our expert team is here to help.

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