Dividend vs Salary in 2026: What’s the Most Tax-Efficient Option for Directors?
For owner directors of UK limited companies, one of the most important and often confusing questions is how to pay yourself. Should you take a salary, dividends, or a blend of both? With tax rules and allowances changing, the optimal mix for 2024/25 (which you’ll be planning for in 2026) requires a fresh look.
Getting this decision right is central to director tax planning. It directly impacts your personal take-home pay, your company’s Corporation Tax bill, and your National Insurance contributions. Let’s break down the key considerations for the year ahead, in plain English.
The Core Difference: Salary vs. Dividend
First, it’s crucial to understand what these payments are from a tax perspective.
Salary: This is treated as a business expense. Your company deducts it from its profits before calculating Corporation Tax. However, for you personally, it is subject to Income Tax and both Employer's and Employee's National Insurance (NI).
Dividend: This is a distribution of after-tax company profits. Your company pays Corporation Tax on its profits first. Dividends are then paid out and are subject to a separate Dividend Tax, but they attract no National Insurance.
This fundamental difference is why a blend is almost always the most efficient approach.
Key Rates and Allowances for 2024/25 (2026 Planning)
Your strategy hinges on these numbers:
Personal Allowance: £12,570 (0% Income Tax).
National Insurance Primary Threshold: £12,570 (Employee NI starts above this).
Employer NI Threshold: £9,100 (Employer NI starts above this).
Dividend Allowance: £500 (0% Dividend Tax).
Tax Rates:
Basic Rate Band: £12,571 to £50,270.
Higher Rate Band: £50,271 to £125,140.
Additional Rate: Over £125,140.
Dividend Tax Rates: 8.75% (basic), 33.75% (higher), 39.35% (additional).
The Classic Tax-Efficient Strategy for 2026
For the 2024/25 tax year, the widely recommended starting point for most directors is:
1. Take a Small Salary up to the Personal Allowance.
A salary of £12,570 is typically optimal. Why?
It uses your tax-free Personal Allowance, so you pay no Income Tax on it.
It is above the Lower Earnings Limit, protecting your state pension entitlement.
Crucially, because it sits at the Employer NI Secondary Threshold (£9,100) but below the Employee NI Primary Threshold (£12,570), it triggers no Employee NI and, with careful planning using the Employment Allowance (if eligible), can often be structured to incur little to no Employer NI. This makes it an extremely cost-efficient way to extract money from the company.
2. Take Further Income as Dividends.
Once the optimal salary is in place, supplement your income with dividends from taxed profits. The benefits:
No National Insurance: This is the biggest saving, as NI rates are significant.
Lower Tax Rates: The dividend tax rates (8.75%, 33.75%, 39.35%) are lower than the equivalent combined Income Tax and NI rates on a salary.
A Simplified Example:
A director wanting a total income of £50,000 in 2024/25 might take:
Salary: £12,570 (0% tax, 0% Employee NI).
Dividends: £37,430.
The first £500 uses the Dividend Allowance (0% tax).
The next £37,130 falls within the basic rate band, taxed at 8.75%.
Estimated total tax liability: ~£3,250.
If the entire £50,000 were taken as salary, the Income Tax and NI liability would be significantly higher, clearly demonstrating the efficiency of the mix.
Important Factors That Change the Calculation
The "standard mix" isn’t right for everyone. Your personal dividend vs salary UK decision must also consider:
Your Personal Tax Band: If your total income (salary + dividends) pushes you into the higher or additional rate bands, the dividend tax advantage narrows but usually remains beneficial.
Pension Contributions: Salaries facilitate higher personal pension contributions. If maximising your pension is a priority, this may influence your salary level.
Mortgage Applications: Lenders often view a stable, consistent salary more favourably than dividend income, which can be seen as variable.
State Benefits: A salary at or above the Lower Earnings Limit protects your entitlement to the State Pension and certain benefits. A dividend-only strategy does not.
The Employment Allowance: If your company can claim the £5,000 Employment Allowance (available to businesses with employer NI liabilities under £100k in the previous year), it can offset the cost of employer NI on salaries, making a slightly higher salary more attractive.
A Word of Caution: Legality and Paperwork
Dividends can only be paid from genuine retained profits. You must hold proper director’s meetings and issue dividend vouchers. Paying a dividend when there are no profits is illegal (‘illegal dividend’) and must be repaid. Rigorous business bookkeeping is non-negotiable here.
The Bottom Line for 2026 Planning
While the core strategy remains sound, the shrinking Dividend Allowance (£500 for 2024/25) means more dividend income is taxable. This makes optimising the salary/dividend split more valuable than ever to maximise take-home pay, tax-efficiently.
The perfect balance depends on your company’s profitability, your personal financial goals, and your future plans. A static, set-and-forget approach could cost you thousands.
Need Help Navigating Your Optimal Split?
Deciding on the right dividend vs salary structure is a key part of director tax planning. A small adjustment can result in substantial annual savings, allowing you to reinvest in your business or your personal wealth.
At Boobooks Accounting, we specialise in creating tailored, compliant strategies for owner-managed UK businesses. We crunch the numbers so you don’t have to, ensuring you extract your income in the most efficient way possible under the current rules.
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