A common question we’re often asked by owner-directors is, ‘Should I pay myself a salary or dividends in 2026?’ There are key differences between extracting a salary and drawing dividends, including Income Tax, National Insurance and Corporation Tax. The way you pay yourself through your company also affects your affordability and protection policies. We explain what you need to know, so you can ensure efficient tax planning and company wealth preservation.
Comparing salary vs dividends
In the UK, many owner-directors have a mixed approach to salaries and dividends. There are various taxes, National Insurance, legal and borrowing considerations, which need to be balanced against current tax rates.
Let’s compare the differences between paying yourself a salary vs dividends:
- Paying yourself a salary will incur Income Tax and Class 1 employee and employer National Insurance. Dividends are taxed at lower rates with no National Insurance.
- When you pay more in salary, this reduces your company’s taxable profits; therefore, your Corporation Tax bill could be lower. In contrast, dividends are paid from your profits after Corporation Tax.
- In the current tax year 2025-26, there’s only a £500 tax-free dividend allowance. The dividend tax rates are 8.75% (basic), 33.75% (higher) and 39.35% (additional). Therefore, the gap between salary and dividend tax narrows at higher income levels.
- Salaries must be processed through PAYE, which is a fixed monthly cost with real-time tax information (RTI) and National Insurance costs. As dividends can only be paid from profit distributions, timings can be more flexible. As an example, payments can be made when cash is available. You could also vary the amounts and pay to different shareholders using share classes – ask our financial planners for advice.
- Receiving a salary requires full PAYE compliance, RTI submissions, and correct National Insurance calculations, which is usually a straightforward process. In comparison, taking dividends requires much more paperwork. From board minutes to dividend vouchers and proof of available profits, using insufficient funds runs the risk of unlawful distributions.
Salary and dividends: impact on borrowing and protection
When you are comparing salaries with dividends, there are other considerations to be aware of. When assessing affordability, lenders generally prefer a stable PAYE income. So, when compared to dividend‑based income, receiving a higher, regular salary can help to make mortgages or personal borrowing easier.
Also, some insurance policies, such as income protection and death‑in‑service, are based on salary rather than dividends. Therefore, a very low salary could limit certain policy benefits. Always check the terms and conditions of your policies so you are clear.
Can you lower Corporation Tax by paying yourself a salary?
When it comes to company wealth preservation, there are various ways to make use of available tax relief and allowances. Company directors can reduce Income Tax and Corporation Tax by using a combination of salaries and dividends.
Company pensions and group life policies can also reduce your Corporation Tax bill, as they’re an allowable business expense. Business owners looking at ways to manage their cash reserves should also consider other ways to minimise their tax liabilities.
Leaving profit extraction or pension contributions too late can result in a higher tax burden for business owners. For more insights on wealth management for businesses, see our Investment and tax planning for businesses page.
Wealth Management, Nottingham
When it comes to paying yourself a salary or dividends, it’s important to get professional financial planning advice for your business. There are various forms of tax relief available for company directors and high earners, so make sure you understand the differences. This will enable you to maximise your earnings, control your money, and secure your wealth strategy.
At Balance: Wealth Planning, our financial planning team support a number of different business clients across almost every industry. We can advise you on ways to help you secure your financial future, including exit strategies and business sale.
For advice on extracting profits from your business, get in touch with our financial planners.
Sources:
https://kingandtaylor.co.uk/how-to-pay-yourself-as-a-director-salary-vs-dividends-explained/
https://www.1stformations.co.uk/blog/tax-efficient-directors-salary-and-dividends/ https://www.fusionaccountants.co.uk/blogs/salary-vs-dividends/
https://wise.com/gb/blog/united-kingdom-corporate-tax
