Dividends & Salary

Optimise your director's remuneration with the right mix of salary and dividends to minimise tax.

Last updated: 15 July 2026

Understanding Your Options

As a director of your own limited company, you have flexibility in how you extract money from the business. The two main methods are salary (subject to PAYE) and dividends (paid from after-tax profits).

Most director-shareholders use a combination of both to minimise their overall tax bill while maintaining certain benefits like pension contributions and mortgage eligibility.

Salary: Pros and Cons

Advantages of Salary

Tax-deductible expense for the company, qualifies for state pension, counts as 'earned income' for mortgage applications and pension contributions.

Disadvantages of Salary

Subject to Income Tax (20-45%) and National Insurance (both employee and employer contributions), higher overall tax than dividends in most cases.

Salary attracts both Income Tax and National Insurance. For every £1 of salary above the NI threshold, the company pays employer's NI (13.8%) and the employee pays employee's NI (12%).

Dividends: Pros and Cons

Advantages of Dividends

No National Insurance contributions, £500 tax-free dividend allowance (2026/27), lower tax rates than salary above the Personal Allowance.

Disadvantages of Dividends

Paid from after-tax profits (so Corporation Tax is paid first), not a company expense, don't count toward state pension, paid from profits only.

What Are the Current Dividend Tax Rates?

2026/27 Dividend Tax Rates

Tax-Free Allowance

First £500 of dividends

Basic Rate Band

Income up to £50,270

10.75%

Higher Rate Band

Income £50,271 - £125,140

35.75%

Additional Rate Band

Income over £125,140

39.35%

Remember, dividends are added to your other income when determining your tax band. Your salary is taxed first, then dividends fill up the remaining bands.

Important Considerations

Profits Required

You can only pay dividends from retained profits. If the company hasn't made enough profit, you cannot declare dividends.

Dividend Documentation

Keep proper records: hold a board meeting, issue dividend vouchers, and record in the minutes. This protects the dividend status if HMRC enquires.

Mortgage Applications

Some lenders prefer to see salary over dividends. If you're planning a mortgage, discuss with a broker about the income evidence required.

Will You Still Qualify for the State Pension?

To qualify for the State Pension, you need National Insurance credits. If your salary is below the NI Lower Earnings Limit (£6,500 for 2026/27), you won't accrue qualifying years.

The salary threshold of £12,570 is above this limit, so you'll still qualify for State Pension benefits while minimising your NI liability.

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Common Questions

Dividends & Salary FAQs

Most director-shareholders use a combination of both to minimise their overall tax bill while keeping benefits like pension contributions and mortgage eligibility. Salary is a tax-deductible expense for the company, qualifies you for the state pension, and counts as earned income for mortgages and pensions, but it attracts both Income Tax and National Insurance. Dividends carry no National Insurance and lower tax rates, but they're paid from after-tax profits and don't count toward the state pension.

The first £500 of dividends is tax-free. After that, dividends are taxed at 10.75% in the basic rate band (income up to £50,270), 35.75% in the higher rate band (£50,271 to £125,140), and 39.35% in the additional rate band (income over £125,140). Dividends are added to your other income when determining your tax band: your salary is taxed first, then dividends fill up the remaining bands.

A few reasons. Dividends can only be paid from retained profits, so if the company hasn't made enough profit you cannot declare them. They're paid from after-tax profits, meaning Corporation Tax is paid first. They don't count toward your state pension. And some mortgage lenders prefer to see salary over dividends, so if you're planning a mortgage, discuss the income evidence required with a broker.

Dividends attract no National Insurance contributions at all. By contrast, for every £1 of salary above the NI threshold, the company pays employer's NI at 13.8% and the employee pays employee's NI at 12%.

Keep proper records: hold a board meeting, issue dividend vouchers, and record the decision in the minutes. This protects the dividend status if HMRC enquires.

To qualify for the State Pension you need National Insurance credits, and if your salary is below the NI Lower Earnings Limit (£6,500 for 2026/27) you won't accrue qualifying years. The commonly used salary threshold of £12,570 is above this limit, so you'll still qualify for State Pension benefits while minimising your NI liability.

Sources

Rates and thresholds on this page come from the official HMRC and Companies House guidance below. Tax rules change, so check the source if you are relying on a figure.

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