Director’s Salary vs. Dividends: What’s the Smartest Move?

If you're a director of a limited company, deciding how to pay yourself is more than just an

admin task — it’s a strategic choice that directly impacts your tax liability, your business’s

financial health, and your long-term stability. So, what’s the smartest move — taking a

salary, drawing dividends, or combining both?

Let’s explore the facts.

Understanding the Basics

A salary is a regular payment made to you as an employee of your own company. It is

subject to Income Tax and National Insurance Contributions (NICs), and it counts as an

allowable business expense, reducing your company’s Corporation Tax liability.

Dividends, on the other hand, are paid from company profits after Corporation Tax. They

are distributed to shareholders and are taxed at different (usually lower) rates than salary.

Unlike salaries, dividends are not considered a business expense and do not reduce

Corporation Tax.

Why Most Directors Choose a Mix

Many directors opt for a blend of a low salary and dividend payments to maximise tax

efficiency. This approach takes advantage of available allowances and reduces both

personal and business tax exposure.

For the 2025/26 tax year, the personal allowance for Income Tax remains at £12,570.

Many directors choose to take a salary up to this amount to avoid paying Income Tax,

while still building qualifying years for state pension entitlement. If the salary stays below

the National Insurance Primary Threshold (currently £12,570), no employee NICs are due,

although employer NICs may still apply above a lower threshold.

Dividends are then taken on top of the salary. In the 2025/26 tax year, the dividend

allowance is £500, with dividends above this taxed at 8.75% (basic rate), 33.75% (higher

rate), or 39.35% (additional rate), depending on your total income level.

Corporation Tax Considerations

Since April 2023, Corporation Tax is now based on a tiered system. Companies with

profits over £250,000 are taxed at 25%, while those with profits under £50,000 remain at

19%. Businesses between these thresholds are subject to a tapered rate.

It’s important to note that only salaries reduce Corporation Tax. Dividends do not — they

come from post-tax profits, so planning dividend payments carefully is essential to avoid

unnecessary tax exposure.

Risks and Trade-Offs

While dividends can be tax-efficient, there are limitations:

• Dividends can only be paid from distributable profits. If your company has not

made a profit, you cannot legally issue dividends.

• Dividends must follow strict procedures: board approval, formal minutes, and

dividend vouchers.

• Relying solely on dividends may impact access to certain benefits, including

statutory maternity pay or higher pension contributions.

• Some mortgage providers prefer salaried income when assessing loan

applications, meaning a dividend-heavy income could affect your borrowing

potential.

So, What's the Smartest Move?

For many directors, the most effective structure involves:

• A salary up to the personal allowance (currently £12,570)

• Dividend payments from post-tax profits

• Possible pension contributions for long-term planning and additional Corporation

Tax relief

• Regular reviews to avoid breaching higher tax thresholds

Ultimately, the best solution depends on your personal financial goals, your business’s

profitability, and your long-term plans.

Final Thoughts

Paying yourself from your company shouldn’t be left to guesswork or habit. The smartest

move is the one that balances tax efficiency with legal compliance and long-term security.

At Pure Cloud Accounting, we help directors make informed decisions about how to

structure their income — so they can focus on running their businesses with clarity and

confidence.

If you'd like a review of your current setup, we’re here to help.

Based in Whitstable. Supporting businesses across Kent and beyond.