Salary vs Dividends

Key facts

Salary is deductible for CT but triggers PAYE Income Tax and National Insurance (employee + employer).
Dividends are not deductible for CT but carry no National Insurance.
The optimal strategy for 2026/27 is typically: salary up to the NI Primary Threshold (£12,570) + dividends above that.
Dividend tax rates are lower than Income Tax rates: 10.75% (basic), 35.75% (higher), 39.35% (additional).
The overall tax picture depends on Corporation Tax rate, marginal relief, and other income.

How Salary Is Taxed

When a company pays salary to a director, the tax treatment is:^[2]^[3]

Corporation Tax: salary is a deductible expense — it reduces the company’s taxable profit
Income Tax: the director pays PAYE Income Tax at 20% / 40% / 45% on salary above the Personal Allowance (£12,570)
Employee NIC: 8% on earnings between £12,570 and £50,270; 2% above that (2026/27 rates)
Employer NIC: 15% on earnings above £5,000 (Secondary Threshold) — also deductible for CT, but an additional cost to the company

How Dividends Are Taxed

Dividends are paid from profits after Corporation Tax has already been charged:^[1]

Corporation Tax: dividends are not deductible — the company pays CT on the full profit before any dividend is declared
Dividend allowance: the first £500 of dividend income is tax-free (2026/27)
Dividend tax rates: 10.75% (basic rate), 35.75% (higher rate), 39.35% (additional rate)
National Insurance: none — no employee or employer NIC on dividends

The Optimal Strategy

For most owner-managed companies, the tax-efficient approach in 2026/27 is:^[2]

Pay a salary up to the NI Primary Threshold / Personal Allowance (£12,570) — this uses the Personal Allowance (so no Income Tax is due), and because it is at or below the Primary Threshold, no employee NIC is payable. The salary is deductible for CT. An employer NIC cost arises on the amount above £5,000.
Take remaining profits as dividends — these carry no NIC and are taxed at the lower dividend rates.

Tip: Some directors pay a salary of exactly £5,000 (the Secondary Threshold) to avoid any employer NIC. However, this leaves £7,570 of Personal Allowance unused. At the cost of an employer NIC charge (~£1,136), paying £12,570 typically saves more in CT deduction than the NIC costs. Run the numbers for your specific situation.

Worked Comparison: £80,000 Company Profit

Assume a standalone company with £80,000 profit before any director remuneration, and no other income. 2026/27 rates.^[1]^[4]

Option A: All Salary

Item	Amount
Gross salary	£80,000
Employer NIC (15% on £75,000)	(£11,250)
Corporation Tax (profit reduced to £0 after salary + ER NIC)	£0
Employee Income Tax	(£13,486)
Employee NIC (8% + 2%)	(£3,474)
Director takes home	£51,790
Total tax & NIC paid	£28,210

Option B: £12,570 Salary + Dividends

Item	Amount
Gross salary	£12,570
Employer NIC (15% on £7,570)	(£1,136)
Taxable company profit (£80,000 − £12,570 − £1,136)	£66,294
Corporation Tax (marginal relief)	(£13,818)
Available for dividends	£52,476
Income Tax on salary	£0 (within Personal Allowance)
Employee NIC on salary	£0 (at or below Primary Threshold)
Dividend tax (£500 allowance, then 10.75% basic / 35.75% higher)	(£9,281)
Director takes home	£55,765
Total tax & NIC paid	£24,235

Result: The salary-plus-dividends approach puts approximately £4,000 more in the director’s pocket in this scenario. The exact saving varies with profit level, CT rate, and other income.^[1]

Important Considerations

The salary-plus-dividends approach is not right for everyone. Consider these factors:

State pension entitlement — you need qualifying NIC credits. A salary at or above the Lower Earnings Limit (£6,708 for 2026/27) qualifies as a year for State Pension purposes, even if no NIC is actually payable
Mortgage applications — lenders may prefer to see a higher salary rather than dividends as evidence of income
Distributable reserves — you can only pay dividends from profits. A company without sufficient retained earnings cannot legally declare dividends
Employment Allowance — if the company qualifies for the £10,500 Employment Allowance (not available to single-director companies with no other employees), employer NIC can be eliminated entirely
IR35 & off-payroll working — if your contract falls within IR35, HMRC expects the income to be treated as employment income with full PAYE and NIC

At Higher Profit Levels

As company profits increase beyond £250,000 (the full 25% CT rate), the relative advantage of dividends narrows because:^[4]

Combined Tax Rate	Salary Route	Dividend Route
Basic rate band	Income Tax 20% + Employee NIC 8% + Employer NIC 15% = up to ~43%	CT 25% + Dividend Tax 10.75% on remainder = ~33.1%
Higher rate band	Income Tax 40% + Employee NIC 2% + Employer NIC 15% = up to ~57%	CT 25% + Dividend Tax 35.75% on remainder = ~51.8%
Additional rate band	Income Tax 45% + Employee NIC 2% + Employer NIC 15% = up to ~62%	CT 25% + Dividend Tax 39.35% on remainder = ~54.5%

Dividends remain more efficient at every level, but the gap narrows at higher rates. At very high income levels, directors may also consider pension contributions, which are deductible for CT and free of NIC. Whichever mix you choose, the salary deduction and resulting profit are reported on the company’s CT600, which you can file online with GoFile.

Frequently Asked Questions

Is it more tax efficient to take a salary or dividends?

For most owner-managed companies, a combination is optimal: a salary up to the NI Primary Threshold (£12,570) to use the Personal Allowance, with remaining profits taken as dividends to avoid National Insurance.

Do you pay National Insurance on dividends?

No. Dividends carry no National Insurance — neither employee nor employer NIC is due. This is one of the main reasons dividends are more tax-efficient than salary for director-shareholders.

What are the dividend tax rates for 2026/27?

Dividend tax rates are 10.75% (basic rate), 35.75% (higher rate), and 39.35% (additional rate) from 6 April 2026. The first £500 of dividend income is covered by the tax-free dividend allowance.

Should I pay myself the minimum salary as a director?

Most advisers recommend a salary of £12,570 to fully use the Personal Allowance. Some directors prefer £5,000 (the employer NIC Secondary Threshold for 2026/27) to avoid any employer NIC, but the CT deduction from a higher salary usually outweighs the NIC cost.

Can I pay dividends if my company has no profit?

No. Dividends can only be paid from distributable reserves (accumulated realised profits). Paying dividends without sufficient reserves is unlawful and may need to be repaid.

Sources

Tax on dividends — GOV.UK
Income Tax rates and Personal Allowances — GOV.UK
National Insurance rates and categories — GOV.UK
Corporation Tax rates — GOV.UK