If you run a limited company, one of the most common questions is:
Should I take a salary or a dividend — or a mix of both?
The answer depends on your profits, tax bands, National Insurance, and how you want to balance cashflow and tax efficiency. This guide breaks down the differences — and how to structure things properly.
What’s the difference between salary and dividends?
| Salary | Dividends | |
| Paid through | Payroll (PAYE) | Company profits (after tax) |
| Taxed as | Employment income (Income Tax + NI) | Investment income (Dividend Tax) |
| Deductible for Corporation Tax? | Yes, reduces Corporation Tax | No, paid from post-tax profit |
| When paid | Regularly (e.g. monthly) | Declared periodically, when profits allow |
| Documentation | Payroll records, payslips | Board minutes, dividend vouchers |
Why take a salary?
Even a modest salary has key benefits:
- Qualifies for State Pension and benefits if above £6,500/year
- Reduces Corporation Tax, since salary is an allowable expense
- Helps for mortgage and finance applications (lenders often prefer salaried income)
- Ensures basic director remuneration is handled properly
Why take dividends?
Dividends can be more tax-efficient — provided they’re taken properly:
- No employee or employer National Insurance
- Lower Income Tax rates than salary (after the £500 allowance)
- More flexible — paid only when company profits allow
However:
- Must come from retained profits (not just cash)
- Must be documented correctly
- Cannot be deducted from Corporation Tax
2025/26 dividend tax rates (after £500 allowance)
| Tax Band | Dividend Tax Rate |
| Basic (to £50,270) | 8.75% |
| Higher (£50k-£125k) | 33.75% |
| Additional | 39.35% |
Watch-outs
- No retained profit = no dividend
- Dividends without documentation = risk of HMRC scrutiny
- Solely relying on dividends = poor for credit/mortgage applications
- Taking too much = overdrawn director’s loan account
Salary and dividend strategy: a common setup
A typical structure (for a single director/shareholder):
- Salary: £9,100 per year
- Above the £6,500 NI qualifying limit (so you build entitlement)
- Below £12,570 personal allowance (so no income tax)
- Triggers small employer’s NI (~£615/year), but reduces Corporation Tax
- Dividends: Up to the basic rate band, depending on profit
- Still within personal allowance + dividend allowance + lower tax band
- Potentially more tax-efficient than salary alone
But this depends on your other income, company profits, and future plans.
Need help considering the options?
At My Finance Department, we help small business owners plan:
- The right salary/dividend mix for tax efficiency
- Forecasts that support decision-making
- Documentation to keep things legal and clean
- Strategic withdrawal planning to avoid surprises
Getting this right isn’t about gaming the system — it’s about using the tools available to you, within the rules, to build a more sustainable and rewarding business.
