Salary vs dividends for company directors
Most owner-directors take a small salary up to the National Insurance threshold, then the balance as dividends. The salary preserves your state pension record and is deductible against Corporation Tax; dividends avoid National Insurance entirely but are paid out of taxed profit.
Why the split exists
Salary is a deductible business expense, so it reduces Corporation Tax, but it attracts both employee and employer National Insurance.
Dividends attract no National Insurance at all, but are paid out of profit that has already borne Corporation Tax at 19% to 25%, and are then taxed again in your hands.
The optimum is therefore a salary high enough to secure the National Insurance benefits and the Corporation Tax deduction, but not so high that it attracts meaningful NI.
Dividend tax rates
The dividend allowance is £500. Above that:
| Band | Dividend tax rate |
|---|---|
| Basic rate | 8.75% |
| Higher rate | 33.75% |
| Additional rate | 39.35% |
What changes the answer
Whether you have other employees, because the Employment Allowance can cover employer National Insurance for companies with more than one employee on the payroll.
Whether you want to make pension contributions, which are deductible for the company and do not count as salary.
Whether the company has enough distributable reserves. Dividends can only be paid out of accumulated realised profits, paying them from an overdrawn position creates an illegal dividend and a director’s loan problem.
Whether you need provable income for a mortgage, where lenders treat salary and dividends differently.
Thresholds move most years. A split optimised two years ago is probably no longer optimal, and almost nobody reviews it unless their accountant raises it.
Getting the paperwork right
Dividends need board minutes and dividend vouchers, and must be declared out of available profits. HMRC does challenge this, and the fallback position, that the payments were in fact salary or a director’s loan, is expensive.
This guide is general information, current at 9 November 2026. Tax rules change and depend on your circumstances. Please take advice before acting on it.