Salary vs dividends: Are you paying yourself tax efficiently?

If you are running your own limited company, you will more than likely have the luxury to decide how you pay yourself.

However, with this freedom comes the responsibility of making sure your income is structured in the most tax-efficient way possible.

Most directors choose to pay themselves through a combination of a salary and dividends.

With dividend rates going up and Income Tax thresholds frozen until 2031, it’s worth reviewing whether your current approach is still the most effective way to take your earnings.

What are the benefits of paying yourself with a salary?

Salaries alone can bring many benefits for directors as they can be deducted as a business expense, reduce Corporation Tax liabilities and help maintain National Insurance records for State Pension purposes.

Many directors choose a salary based around key thresholds, such as £6,500 to secure National Insurance credits or £12,570 to fully utilise the personal allowance without triggering Income Tax.

However, once your income exceeds the Personal Allowance, Income Tax will apply.

The current Income Tax rates are:

Also, salaries that go above certain levels can result in employee and employer National Insurance contributions and this will increase the overall costs to your business.

Why should you consider dividends as part of your pay?

Directors often use dividends as a tax-efficient way to top up of their income.

However, from April 2026, the dividend tax rates are increasing:

Despite these rising rates, dividends do not lose their benefits and it is still more efficient to take dividends and a salary, instead of a salary alone.

This is mainly because dividends are not subject to National Insurance and the tax rates are significantly lower than those for Income Tax.

However, they can only be paid from retained profits after Corporation Tax, so your company must be performing well enough to support this.

You also need to ensure that you are declaring your dividends properly with the right documentation and reporting them through your Self-Assessment tax return.

How can we support you?

It’s not always easy to know if you’ve got the right balance between your salary and dividends and there is no perfect structure for all directors and companies.

Our professional team are here to support you by reviewing your salary and dividend strategies and ensuring your income is structured as efficiently as possible.

We will also assess that you are declaring your pay properly, so you can take that sigh of relief that you are staying compliant.

For further advice on dividends and paying yourself, contact our team today.