Salaries vs dividends explained for UK business owners
Salaries vs dividends is one of the most common decisions owner managed limited company directors face when paying themselves. The right mix is usually a balance of tax, compliance, and what you need your income to do in real life.
If you are building the bigger picture, our how to Run a Limited Company guide explains the key moving parts directors need to stay on top of. This guide is principle-led, with minimal focus on rates, because thresholds change over time and personal circumstances matter.
Key figures at a glance (2025/26 and April 2026)
I have kept the blog mostly principle based, but a few current figures help you sanity check your plan. If you want the official source tables, start with GOV.UK’s Rates and thresholds for employers 2025 to 2026 and Income Tax rates and Personal Allowances.
| Item | Figure | Why it matters |
| Personal Allowance (Income Tax) | £12,570 | Dividend tax bands sit on top of your other income, so the Personal Allowance affects how much of your dividends are taxed. |
| Employee Class 1 NIC Primary Threshold (annual) | £12,570 | Helps explain why many directors use a modest baseline salary before topping up with dividends. |
| Employer Class 1 NIC Secondary Threshold (annual) | £5,000 | Employer NIC starts above this level, so salary decisions can have a direct employer NIC cost. |
| Employment Allowance (if eligible) | Up to £10,500 | Can reduce employer Class 1 NIC, which can change the real cost of running payroll. See Employment Allowance. |
| Dividend tax ordinary rate (current rules) | 8.75% | The ordinary rate applies to dividends that fall within the basic rate band, after allowances. See Tax on dividends. |
| Dividend tax ordinary and upper rate change (from 6 April 2026) | 10.75% and 35.75% | The government has published that the dividend ordinary rate will rise to 10.75% and the dividend upper rate to 35.75% from 6 April 2026. See Income Tax changes to dividend rates. |
| Corporation Tax main and small profits rates | 25% and 19% | Dividends come from post tax profits, so Corporation Tax affects what is available to distribute. See Corporation Tax rates and Marginal Relief. |
Salaries vs dividends in plain English
A salary is pay through payroll. Dividends are payments to shareholders from company profits.
In a one director company, you are often both the director and the shareholder, so it can feel like two labels for the same thing. In reality, they work differently, carry different paperwork, and are taxed in different ways.
Salary is a deductible business cost
A director salary is generally treated like any other staff cost, meaning it can reduce taxable profits when it is incurred wholly and exclusively for the business. It comes with PAYE, reporting, and payroll records.
If you have never run payroll before, GOV.UK’s guidance on registering as an employer is a useful starting point for understanding the compliance side.
Dividends come from post-tax profits
Dividends are not a business cost. They are paid out of profits after Corporation Tax, so the Corporation Tax rate your company pays (19% small profits rate or 25% main rate, with Marginal Relief in between) affects what is available to distribute.
GOV.UK is clear that your company must not pay out more in dividends than its available profits from current and previous financial years, and you must keep the proper meeting records when declaring a dividend. See Taking money out of a limited company for the core rules.
The simple rule of thumb
Most directors use salary for a stable baseline, then use dividends to top up when profits allow. For context, many director plans start with a salary aligned to key thresholds (for example, the 2025/26 employee Primary Threshold is £12,570 per year), while watching the employer NIC point (the 2025/26 employer Secondary Threshold is £5,000 per year unless Employment Allowance applies). The best split then depends on profit levels, personal income needs, and how much admin you want to take on.
Salary basics for directors
Salary is the most structured way to pay yourself. That structure can be useful, especially when you want predictable monthly income and simple evidence for lenders.
PAYE and RTI, what you are signing up to
PAYE stands for Pay As You Earn, which is the UK system where tax and National Insurance are deducted by an employer before you are paid. You will normally run payroll and report pay information to HMRC through Real Time Information.
National Insurance thresholds, the principle
Directors often choose a modest salary level because National Insurance and tax thresholds can make the marginal cost of salary higher above certain points. The exact figures change, but the principle is consistent: set a salary that is defensible, affordable for the company, and easy to maintain.
To make that principle concrete, the GOV.UK employer thresholds for 2025/26 show an employee Primary Threshold aligned to £12,570 per year and an employer Secondary Threshold of £5,000 per year, with employer NIC starting above that level.
Timing and paperwork
Good payroll looks boring. Pay the salary on a consistent schedule, keep payslips, and make sure payroll records match your bank payments. This keeps the story clean if HMRC or a lender asks questions.
Dividend basics for directors
Dividends are flexible, but they require discipline. A dividend is not the same as taking money out of the bank.
You can only pay dividends from profits
A dividend can only be paid from profits available for distribution. This is a Companies Act principle and HMRC mirrors it in its internal guidance on distributions. If you want the legal wording, section 830 of the Companies Act 2006 covers distributions out of profits.
In practice, this means you need accounts that show you have retained profits, not just cash in the bank.
Dividend paperwork
Even if you are a sole director, treat dividend paperwork properly. Hold a directors’ meeting to declare the dividend and keep minutes, and issue a dividend voucher for the shareholder record. These steps are explicitly referenced in GOV.UK’s dividends guidance within Taking money out of a limited company.
Dividend allowance, the principle
Dividend tax rules include allowances and rates that change over time. The practical point is that dividends are taxed personally, and the company needs enough distributable profits to pay them.
For context, GOV.UK sets out the current dividend rates (ordinary, upper and additional) and the dividend allowance, and it also confirms that you only pay dividend tax on amounts above the allowance.
If you are planning ahead for the next tax year, the government has announced that the dividend ordinary rate will rise to 10.75% and the dividend upper rate will rise to 35.75% from 6 April 2026.
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How Corporation Tax changes the dividend picture
Corporation Tax sits in the middle of the dividend plan because the company pays it before dividends are available.
Why cash in the bank is not the same as profit
Cash is what is in your account. Profit is what is left after recognising income and expenses, including timing differences. A company can have cash but limited distributable profits, or have profits but cash tied up in debtors.
Planning for tax bills
A tidy approach is to reserve for Corporation Tax through the year, so dividends do not accidentally spend money that will be needed later. This avoids the classic shock of a tax bill arriving after a year of generous withdrawals.
If you want the current framework, GOV.UK explains that the small profits rate is 19% for taxable profits of £50,000 or less, the main rate is 25% above £250,000, and Marginal Relief can apply between those limits. See Corporation Tax rates and Corporation Tax Marginal Relief.
Real-world decision factors beyond tax
Tax matters, but it is not the only factor. In practice, salaries vs dividends is also about choosing a split that supports predictable life admin.
Mortgage and borrowing evidence
Lenders often find salary easier to evidence because payslips and P60s are standard. Dividends can still count, but they often require accounts and tax documents, and the lender may average income across years. When clients ask me about this choice, I remind them that the cleanest path is usually the one with the clearest paperwork.
Statutory payments and benefits
In some situations, salary can support eligibility for statutory payments. The details depend on circumstances, but the principle is that payroll pay is recognised differently to dividend income.
Personal budgeting and consistency
If you want your household budget to feel calm, a regular salary can help. Dividends can then be used for planned top ups, saving goals, or occasional larger withdrawals when profits are strong.
Pension contributions as a third lever
A salary and dividends plan does not have to be only two options. Employer pension contributions can sit alongside them as a tax planning and long-term savings tool.
Why pensions can be tax efficient for companies
HMRC’s pensions manual explains that tax relief for employer contributions is normally given by allowing the contribution as a deduction when calculating taxable profits, which reduces the employer’s taxable profit.
Balancing salary, dividends, and pensions
A common approach is to use salary for baseline income, dividends for flexible top ups, and pensions for long-term value. This can be particularly useful where you do not need to take every pound out of the business right now.
Keeping it compliant
Pension contributions still need to be justifiable and recorded properly. Keep clear records of what was paid, when, and why it fits the business purpose.
Common mistakes directors make
Most problems with dividend vs salary are not complex tax issues. They are practical mistakes that create messy records.
Taking dividends when profits are not there
If dividends are paid without distributable profits, they can become an overdrawn director’s loan issue or create tax and legal headaches later. The clean fix is to check profits before declaring, not after.
Mixing personal and business spending
If personal spending runs through the company, it becomes harder to calculate profit, dividends, and loan balances cleanly. Separation keeps your options open and reduces the risk of mistakes.
Not running payroll correctly
Payroll errors tend to compound. Late filings, inconsistent pay dates, or missing records create questions you do not want, especially when applying for finance.
Case study, one-director company scenario
A one director consultancy company was trading steadily but paying the director irregular amounts, with no clear plan.
The situation and the challenge
The director wanted to keep tax efficient, but did not want constant admin. They also wanted to apply for a mortgage within the next 12 months, so they needed predictable evidence of income.
The accountant’s plan
We set a consistent payroll salary as a baseline and mapped dividends to quarterly profit checks. We also set aside a monthly amount for Corporation Tax and tidied bookkeeping so profit and cash were not confused.
Worked example table (illustrative only)
This is the kind of simple comparison we build for directors. Figures are rounded and for illustration only. It assumes one director, no other payroll, and uses a single Corporation Tax rate just to show the flow from profit to dividends. Your real outcome depends on your wider income, allowances, and your company’s Corporation Tax position.
| Item | Salary heavy approach | Salary plus dividends approach |
| Company profit before director pay | £80,000 | £80,000 |
| Director salary paid | £50,000 | £12,570 |
| Profit after salary (before Corporation Tax) | £30,000 | £67,430 |
| Corporation Tax (illustrative at 19% to reflect small profits rate) | £5,700 | £12,812 |
| Post tax profit available for dividends | £24,300 | £54,618 |
| Dividends taken | £0 | £35,000 |
| Money left in the company after dividends | £24,300 | £19,618 |
| What this shows | More taken as payroll, less left for dividends and reinvestment. | More flexibility, but dividends must match profits and paperwork. |
The outcome
Income became predictable, records became cleaner, and the director knew what could be withdrawn without risking a tax shortfall. It also meant their income evidence was easier to explain to a lender.
A simple take-home framework
When clients ask me to simplify this, I bring it back to a small set of decisions.
Start with the company’s profit position
Before you withdraw, understand what the business has actually earned and what it needs to keep for tax and commitments.
Choose a stable baseline income
Pick a salary level you can sustain month after month, with payroll run properly and records kept tidy.
Top up with dividends when profits allow
Use dividends as the flexible part of the plan. Treat them as a decision you make after checking profits, not a habit.
Use pensions for long-term planning where it fits
If you do not need all profits as personal income, pensions can be a sensible way to use company money efficiently.
Conclusion
The best answer to salaries vs dividends is rarely a single number. It is a balanced plan that considers profit, compliance, and how you want your personal income to behave through the year. If you keep payroll tidy, only declare dividends when profits support them, and plan for tax bills, you reduce stress and make better decisions. For a clear breakdown of the main options and common pitfalls, read how to pay yourself from a limited company.
FAQs
Can I take only dividends and no salary as a director?
In some cases you can, but it is rarely the simplest path. Dividends require distributable profits and proper paperwork, and many directors also want the stability and evidence that payroll provides. A blended approach often creates a clearer income story.
What happens if I pay dividends when the company has no profits?
You may create a problem that needs correcting later, such as an overdrawn director’s loan or an unlawful distribution issue. The practical fix is to review management accounts before declaring dividends and keep minutes and vouchers properly.
Do dividends reduce Corporation Tax?
No. Dividends are not a business cost, so they do not reduce taxable profits. GOV.UK explains this point in its guidance on taking money out of a limited company.
Do I need payroll if I am the only director?
If you pay yourself a salary, payroll is the normal route because PAYE reporting applies. Even if amounts are small, consistent payroll and record keeping helps keep everything aligned with HMRC requirements and avoids problems later.
Where do pensions fit if I am deciding how to pay myself?
Pensions can sit alongside salary and dividends as a third lever. Employer contributions are often deductible for the company and can be a tax efficient way to save long term, provided they are properly recorded and justifiable for the business.
Whether you’re just starting out or running a growing business, we’re here to help with practical accountancy and tax support that matches your goals. Learn how we support UK business owners at Henry & Banwell Chartered Accountants, and get in touch for advice tailored to your situation.