Salary vs Dividends — Which Is More Tax Efficient?
For limited company directors, salary and dividends have different tax and company-cost consequences. A mixed approach can be tax-efficient, but there is no universal best split: it depends on profits, other income, employment rights, and personal circumstances.
If you run a limited company, you can choose how to extract profits — as salary, dividends, or a mix. Each route has different tax implications for both you and your company. This comparison explains the key differences using current published rates.
What each option means
Salary
Paid as employment income. Subject to income tax and employee National Insurance. Your company may also pay employer National Insurance. Salary is generally a deductible business expense, reducing Corporation Tax.
Dividends
Paid from post-tax company profits. Subject to dividend tax (10.75%, 35.75%, or 39.35% for 2026/27, depending on your band) but not National Insurance. The £500 dividend allowance is taxed at 0% after any available Personal Allowance.
Key differences
| Aspect | Salary | Dividends |
|---|---|---|
| Income tax | 20% / 40% / 45% (standard bands) | 10.75% / 35.75% / 39.35% (2026/27) |
| National Insurance (employee) | 8% above £12,570 | None |
| National Insurance (employer) | May apply; check current employer thresholds | None |
| Corporation Tax impact | Salary is deductible — reduces CT bill | Dividends paid from post-CT profits |
| Tax-free allowance | Personal Allowance: £12,570 | Dividend Allowance: £500 + remaining PA |
| Pension contributions | Salary counts as pensionable earnings | Dividends do not count for pension auto-enrolment |
Best for
Salary is better when…
You want to build up NI qualifying years for state pension, need pensionable earnings, or want to maximise deductible expenses against Corporation Tax.
Dividends are better when…
You want to minimise NI costs and your combined income stays within the basic rate band. Most directors take a small salary up to the NI primary threshold and the rest as dividends.
A combination is usually optimal
The most common approach is a salary around £12,570 (to use the Personal Allowance and qualify for NI credits) with the remainder as dividends, up to your desired income level.
Assumptions and caveats
- This comparison uses current published rates and simplified assumptions
- It does not account for IR35 status, employment rights implications, or pension auto-enrolment thresholds
- Corporation Tax rates (19% or 25%) affect the overall comparison
- Individual circumstances, other income, and reliefs will change the outcome
- This is not tax advice — consult a qualified accountant for your specific situation
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Official sources
Rates and thresholds are checked against the following primary sources. Review dates are shown on the relevant guide or methodology page.
Scope: This comparison is general information for common limited-company scenarios. It does not calculate Corporation Tax, Employment Allowance, IR35, employment-rights effects, director National Insurance or a personalised optimal split.
Last reviewed: 12 July 2026