Director salary vs dividend tax efficiency UK
Taking a salary from your own limited company is straightforward. Taking a mix of salary and dividends so that you keep more after tax is where many directors get stuck. The balance between director salary and dividends in the UK is a question of tax efficiency, legal compliance, and personal circumstances. This article explains how director salary vs dividend tax efficiency works for UK limited companies, so you can structure your pay in a way that makes sense.
We cover how salary and dividends are taxed, the role of the director's loan account, and common patterns for owner-managers. This is for limited company directors who want to understand the trade-offs without turning into tax experts.
How salary and dividends are taxed
Salary
Salary is subject to income tax and National Insurance (employee and employer). You get a personal allowance (currently £12,570 for 2024/25 and 2025/26). Above that, tax rates apply (20%, 40%, 45%). Employer NI is due on salary above the secondary threshold; that is an extra cost to the company. Many directors take a salary at or just below the NI threshold so they qualify for the state pension and use the allowance, but keep the employer NI bill low.
Dividends
Dividends are paid from profits after corporation tax. They do not attract National Insurance. There is a dividend allowance (£500 for 2025/26); above that, dividends are taxed at 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate). So for many owner-managers, taking the rest of their income as dividends is more tax-efficient than taking it as salary, because NI is avoided. The company must have sufficient retained profits to pay the dividend; otherwise it can be reclassified. For more on taking money out of the company, see our Statutory Accounts & Tax service.
The typical pattern: low salary, rest as dividend
A common approach is:
- Pay yourself a salary up to the NI primary threshold (or just below the employer NI threshold) so you get state pension years and use the personal allowance.
- Take the rest of your required income as dividends, declared properly with board minutes and a dividend voucher.
- Keep the director's loan account clear: do not take ad-hoc cash without declaring it as salary or dividend.
Example
For 2025/26, a director might take £12,570 salary (using the personal allowance, minimal or no NI) and £30,000 in dividends. The dividends are taxed at 8.75% on the amount above the £500 allowance. Total tax on the dividends is much lower than if the same amount were taken as salary (which would attract 20% income tax plus NI). The exact numbers depend on other income and the company's profits. HMRC guidance on dividends explains the rates.
What to watch out for
Reasonable salary
If you are the only director and you take no or very low salary while taking large dividends, HMRC may argue that some of the dividend should be reclassified as salary (especially if you are doing a full-time job). There is no fixed "reasonable" amount, but paying yourself at least something as salary is normal and reduces risk.
Retained profits
You can only pay a dividend if the company has enough distributable reserves (accumulated profits after tax, less any previous distributions and adjustments). Paying a dividend without reserves can be unlawful and may be reclassified as a loan or salary.
Director's loan account
Any money you take that is not salary or dividend goes through the director's loan account. If you owe the company at the year end and do not repay within nine months, the company may have to pay Section 455 tax. Keep the DLA tidy. For support with payroll and PAYE, we help directors get the salary side right so the rest stacks up.
UK tax and legal accuracy
The rules described apply to the UK tax years 2024/25 and 2025/26. Dividend and NI thresholds can change. This article is for informational purposes only and does not constitute professional tax or financial advice. Please speak to a qualified accountant before taking action.
Frequently asked questions
Is it legal to take a low salary and high dividends?
Yes, provided the company has sufficient profits and the dividend is properly declared. The salary should be reasonable for the work you do; otherwise HMRC may seek to reclassify.
What is the most tax-efficient split?
It depends on your total income, other earnings, and the company's profits. For many, a salary at or just below the NI threshold plus the rest as dividends is efficient. Your accountant can model different scenarios.
Do I need to pay myself through payroll?
Yes, for the salary part. The company must run payroll, report to HMRC (FPS, etc.), and pay employer NI if due. Dividends are not paid through payroll; they are declared and recorded separately.
Can I change the split during the year?
Yes. You can adjust salary (subject to payroll) and declare dividends when the company has profits and reserves. You cannot backdate a dividend to a period when there were no reserves.
What about the dividend allowance?
The dividend allowance (£500 for 2025/26) means the first £500 of dividend income is tax-free. Above that, dividend tax applies. The allowance has been reduced in recent years; check current rates with your accountant.
Summary and next steps
Director salary vs dividend tax efficiency in the UK comes down to using salary to secure state pension and personal allowance with minimal NI, and dividends to take the rest of your income at lower tax rates. Keep the structure legal (retained profits, proper paperwork) and the director's loan account clear.
If you would like to discuss how you pay yourself from your company, we would be glad to help. At Figures Chartered Accountants we work with UK limited company directors on salary, dividends, and tax. You can book a discovery call or look at our Statutory Accounts & Tax and Payroll & PAYE services.