Salary vs Dividends: What’s the Most Tax-Efficient Way to Pay Yourself?
By Joseph Spiers
Discover the differences between salary and dividends, explore updated 2026/27 tax rates and learn how company directors can plan their income tax-efficiently.
If you run a limited company in the UK, deciding how to pay yourself can make a significant difference to your take-home income and your business’s finances.
You can pay yourself a salary, take dividends if you are a shareholder, or combine the two. Each option has different tax implications, and the most suitable approach depends on your company’s profits, your other income, National Insurance position and longer-term financial plans.
The rules have changed in recent years, too. For the 2026/27 tax year, the dividend allowance is just £500, dividend tax rates have increased for basic- and higher-rate taxpayers, and employer National Insurance is higher than it was a few years ago.
So, is it better to take a salary or dividends? And could a combination of the two help you keep more of your hard-earned money?
What is the difference between salary and dividends?
Before comparing the tax implications, it helps to understand how each payment works.
Taking a salary
As a company director, you can pay yourself a salary through your company’s payroll, just as an employee would receive wages.
A salary is normally treated as an allowable business expense, reducing the company’s taxable profits. However, it can be subject to Income Tax, employee National Insurance and employer National Insurance, depending on how much you earn and which allowances apply.
A salary can also help build entitlement to certain state benefits and provide relevant earnings for personal pension contributions.
Taking dividends
Dividends are payments made to shareholders from a company’s available profits after Corporation Tax. They are not a business expense, so they do not reduce the company’s taxable profits.
Dividends are not subject to National Insurance, which can make them attractive to company owners. However, you must own shares to receive them, and your company must have sufficient distributable profits.
Can a company director take dividends without being a shareholder? No. Being a director alone does not entitle you to dividends. Payments must also follow the company’s share rights and the relevant legal requirements.
Dividends can offer flexibility, but they should not be treated as a substitute for salary in every situation. They must be properly declared and supported by the company’s accounts.
What are the tax implications of taking a salary?
Your salary is normally subject to Income Tax and National Insurance once the relevant thresholds are exceeded.
For the 2026/27 tax year, the standard Personal Allowance is £12,570. This is the amount most people can earn before paying Income Tax, although it reduces by £1 for every £2 of adjusted net income above £100,000 and disappears at £125,140.
For taxpayers in England, Wales and Northern Ireland, the main Income Tax rates are:
Up to £37,700 above the Personal Allowance - 20%
£37,701 to £125,140 - 40%
Above £125,140 - 45%
The thresholds and rates differ for some income in Scotland. Your actual tax bill will also depend on your total income, tax code and available allowances.
National Insurance on salary
For most employees and directors…