You run your own limited company. Business is going well. You have got money sitting in the company account and you need to pay yourself. The question is: how?
You could take it all as salary, just like any employee. But your accountant — or that friend who "knows about tax" — has probably told you that taking a small salary and topping up with dividends is more tax-efficient. And they are right. But the gap has been narrowing every year, and with the changes for 2025/26, it is worth revisiting the numbers.
Let us walk through exactly how it works, why it works, and how to find the sweet spot for your situation.
Why the Salary-Plus-Dividends Strategy Exists
The reason directors pay themselves this way comes down to National Insurance. Salary attracts both employee and employer NI. Dividends do not attract any NI at all. Zero. That is a significant saving.
On a salary of £50,270 (the higher rate threshold), you would pay:
- Employee NI: approximately £3,568
- Employer NI (which your company pays): approximately £6,268
- Total NI cost: approximately £9,836
That is nearly ten thousand pounds going to NI alone. Take the same money as dividends instead, and the NI cost is zero. Even after paying the dividend tax rate, you come out significantly ahead.
The Optimal Salary for 2025/26
Most accountants recommend a salary at or around the NI Primary Threshold — currently £12,570 per year. This is also the personal allowance, which means:
- You pay zero income tax on your salary (it is covered by the personal allowance)
- You pay zero employee NI (you are at the threshold, not above it)
- Your company pays minimal employer NI
- The salary still counts as a business expense, reducing your corporation tax bill
- You protect your State Pension entitlement by paying enough NI to qualify
Some accountants suggest going slightly higher — to £12,570 exactly — while others recommend staying at the NI Secondary Threshold (£5,000). The difference depends on whether the employer NI cost outweighs the corporation tax saving. Our dividend vs salary calculator lets you model both scenarios instantly.
How Dividend Tax Works
Once you have taken your optimal salary, you extract the rest as dividends. Dividends come out of company profits that have already had corporation tax deducted. So there is a two-stage process:
Stage 1: Corporation Tax. Your company pays 25% corporation tax on profits above £250,000, or 19% on profits below £50,000 (with marginal relief in between). Use our corporation tax calculator to see exactly what your company owes.
Stage 2: Dividend Tax. When you draw dividends from the post-tax profits, you pay personal dividend tax. The rates for 2025/26 are:
- Basic rate: 8.75% (on dividends within the basic rate band)
- Higher rate: 33.75% (on dividends in the higher rate band)
- Additional rate: 39.35% (on dividends above £125,140)
There is also a £500 dividend allowance — the first £500 of dividends is tax-free. It used to be £2,000, then £1,000, and now £500. That reduction has chipped away at the tax efficiency of dividends every year.
A Worked Example: £65,000 Total Income
Let us say your company has enough profit for you to take £65,000 in total. Here is how the numbers compare:
Option A — All salary (£65,000):
- Income Tax: approximately £10,432
- Employee NI: approximately £3,568
- Employer NI (company pays): approximately £8,298
- Total tax cost: approximately £22,298
Option B — £12,570 salary + £52,430 dividends:
- Income Tax on salary: £0 (covered by personal allowance)
- Employee NI on salary: £0 (at threshold)
- Corporation Tax on £52,430 profit: approximately £9,962 (at 19%)
- Dividend Tax on £42,468 post-CT dividends: approximately £3,672
- Total tax cost: approximately £13,634
The salary-plus-dividends route saves roughly £8,664 per year. That is serious money — and it is completely legal and widely used. HMRC is perfectly aware of this strategy. It is the way the tax system is designed.
Our dividend vs salary calculator runs this comparison instantly. You can adjust the salary level, change the total amount, and see the impact in real time.
What About the Changes Coming in 2026/27?
From April 2026, dividend tax rates are going up by 2 percentage points. The basic rate moves from 8.75% to 10.75%, and the higher rate from 33.75% to 35.75%. Combined with the dividend allowance being slashed to £500, the salary-plus-dividends strategy is becoming less generous.
It is still more efficient than taking everything as salary — the NI saving alone ensures that. But the gap is narrowing. If you are extracting large sums as dividends, the additional tax in 2026/27 could be several hundred to a few thousand pounds depending on the amount.
This makes it even more important to run the numbers for your specific situation rather than relying on generic advice.
When Your Accountant Looks You Up on Their Phone
Here is something that happens more than you might think. You are in a meeting with your accountant. You ask: "If I take £40,000 salary and £25,000 in dividends, what is my total tax?" Your accountant knows the answer roughly. But you want the exact number, and their tax software needs a client file to be loaded up.
So they pull out their phone, open YourIncomeCalculator, and run the numbers in eight seconds. They read you the answer — combined tax liability, effective rate, and the breakdown showing where the savings come from.
You ask: "What if I did £35,000 salary and £30,000 dividends instead?" They adjust the inputs. Two seconds later, you have the new answer.
This is exactly what our dividend vs salary calculator is built for — fast, accurate comparisons that let you explore different scenarios in real time.
Other Extraction Strategies to Consider
Salary and dividends are not the only ways to get money out of your company. Other options include:
- Pension contributions — your company can make employer pension contributions on your behalf. These are deductible as a business expense (reducing corporation tax) and are not subject to income tax, NI, or dividend tax. Up to £60,000 per year (or your total earnings, whichever is lower). This is one of the most tax-efficient extraction methods available. Our pension calculator can model the impact.
- Rent — if you work from home, your company can pay you a market-rate rent for the use of your home office. This is a deductible expense for the company and rental income for you, which can be offset against the property allowance.
- Mileage — if you use your personal car for business, your company can reimburse you at HMRC's approved mileage rates (45p per mile for the first 10,000 miles, 25p after that). This is tax-free for you and a deductible expense for the company.
The Bottom Line
If you run a limited company, how you pay yourself is one of the most impactful financial decisions you make each year. The difference between the optimal split and the worst approach can be £5,000 to £15,000 per year in unnecessary tax.
Take five minutes to run your numbers through our dividend vs salary calculator. Check what your corporation tax looks like. Model the impact of pension contributions. And then have a conversation with your accountant about whether your current setup is still the most efficient way to pay yourself.
The rules change every year. The numbers should be re-run every year too.