Should I Take Salary or Dividends as a Director?
Answer: Take a low salary (£6,500) plus dividends. This combination typically saves thousands in tax compared to taking it all as salary.
This guide shows exactly how much tax you pay with each method at different income levels.
Understanding the Tax Difference
Salary
- • Income Tax: 0% / 20% / 40% / 45%
- • Employee NI: 8% (above £12,570)
- • Employer NI: 15% (above £5,000)
- • Corporation Tax saving: 19-25%
Dividends
- • Dividend Tax: 8.75% / 33.75% / 39.35%
- • No National Insurance
- • £500 tax-free allowance
- • Paid from post-CT profits
2025/26 Tax Rates Summary
| Income Band | Income Tax | Dividend Tax |
|---|---|---|
| £0 - £12,570 (Personal Allowance) | 0% | 0% |
| £12,571 - £50,270 (Basic Rate) | 20% | 8.75% |
| £50,271 - £125,140 (Higher Rate) | 40% | 33.75% |
| Over £125,140 (Additional Rate) | 45% | 39.35% |
Detailed Comparison: £30,000 Extraction
Let's compare extracting £30,000 from your company using different methods:
Option A: All Salary (£30,000)
| Gross Salary | £30,000 |
| Employer NI (15% on £25,000) | -£3,750 |
| Employee NI (8% on £17,430) | -£1,394 |
| Income Tax (20% on £17,430) | -£3,486 |
| Corporation Tax saved (25% on £33,750) | +£8,438 |
| Net in Pocket | £25,120 |
| Total Cost to Extract £30k | £4,880 |
Option B: £6,500 Salary + £23,500 Dividends
| Salary (£6,500) | £6,500 |
| Employer NI (15% on £1,500) | -£225 |
| Employee NI | £0 |
| Income Tax on Salary | £0 |
| CT saved on salary (25% on £6,725) | +£1,681 |
| Dividend Extraction | |
| Profit before dividends | £31,333 |
| Corporation Tax (25%) | -£7,833 |
| Available for dividends | £23,500 |
| Dividend Tax (8.75% on £17,430 - £500 allowance) | -£1,481 |
| Net in Pocket | £28,519 |
| Total Cost to Extract £30k | £1,481 |
Winner: Low Salary + Dividends
At £30,000 extraction, the salary + dividends approach saves approximately £3,399 compared to taking it all as salary. That's £3,399 more in your pocket.
Comparison at Different Income Levels
The optimal strategy varies by how much you're extracting. Here's a summary:
| Total Extraction | All Salary Tax | Low Salary + Div Tax | Savings |
|---|---|---|---|
| £20,000 | ~£2,800 | ~£600 | ~£2,200 |
| £30,000 | ~£4,900 | ~£1,500 | ~£3,400 |
| £50,000 | ~£11,400 | ~£5,200 | ~£6,200 |
| £75,000 | ~£22,600 | ~£13,100 | ~£9,500 |
| £100,000 | ~£35,200 | ~£22,400 | ~£12,800 |
*Figures are approximate and assume 25% Corporation Tax rate and no Employment Allowance. Actual amounts depend on individual circumstances.
The Corporation Tax Factor
A crucial consideration is that dividends come from post-Corporation Tax profits. Here's how CT affects the comparison:
Corporation Tax Rates 2025/26
- 19% – Profits up to £50,000
- 25% – Profits over £250,000
- Marginal rate – Between £50,000 and £250,000 (effective 26.5%)
Lower CT rates make dividends even more attractive. If your company profits are under £50,000, you pay only 19% CT before extracting dividends.
The Effective Tax Rate
When comparing methods, consider the effective combined rate (CT + dividend tax or salary taxes):
| Method | Basic Rate | Higher Rate |
|---|---|---|
| Salary (inc. Employer NI) | ~40% | ~58% |
| Dividends (25% CT + div tax) | ~31.5% | ~50.3% |
| Dividends (19% CT + div tax) | ~26% | ~46.3% |
When Salary Makes Sense
Despite dividends being generally more tax-efficient, there are situations where salary is preferable:
Up to £6,500 (LEL)
A small salary maintains state pension credits with minimal employer NI. This is almost always recommended.
Employment Allowance Available
If you qualify for EA, salary up to £12,570 becomes very attractive as employer NI is offset.
Pension Contributions
Personal pension contributions are limited to your relevant UK earnings. Higher salary = higher pension contribution allowance.
Mortgage Applications
Lenders prefer PAYE income. A higher salary may help you qualify for a larger mortgage.
The Optimal Strategy
For most directors, the ideal approach combines a tax-efficient salary with dividends:
Salary: £6,500
Preserves state pension, minimal NI
Dividends to Basic Rate Band
8.75% tax rate, no NI
Consider Pension Contributions
Tax-free extraction (accessible later)
Retain Excess in Company
Delay higher-rate dividend tax
Important Considerations
- Dividend availability: You can only pay dividends from retained profits
- IR35: If caught by IR35, you must take most income as salary
- Other income: Factor in any other PAYE income when planning
- Child Benefit: Income over £60,000 triggers the High Income Child Benefit Charge
- Personal Allowance taper: Income over £100,000 reduces your tax-free allowance
2025/26 Key Thresholds
| Threshold / Rate | Amount |
|---|---|
| Personal Allowance | £12,570 |
| Lower Earnings Limit (LEL) | £6,500 |
| Secondary Threshold (ST) | £5,000 |
| Employer NI Rate | 15.0% |
| Dividend Tax (Basic Rate) | 8.75% |
| Dividend Allowance | £500 |
Sources
Disclaimer: This guide is for informational purposes only and does not constitute financial or tax advice. Please consult a qualified accountant for advice specific to your circumstances.