Salary Vs Dividends – Which Is More Tax-Efficient For 2025/26?

Unlike a sole trader or partnership, where you are taxed personally on your profits each year, as a shareholder you have more flexibility to decide the level of profits that you take each year as remuneration.

It is important to review your remuneration annually to ensure that you are staying tax efficient. In this article, we will explore the most tax-efficient ways for directors to remunerate themselves in the 2025/26 financial year. In some situations, it can be more tax efficient now to take a higher salary rather than a lower salary plus dividends due to the tax changes. It is important to choose the right one/ right mix of both, as this can impact the financial health of the owner and the company.

Let’s discuss all of the options:

Salary:As Directors of a company, you could take a salary through the payroll, in the same way that you would pay your employees. This can become a very costly form of remuneration however as you will personally pay both Income Tax and Class 1 National Insurance, and the company will also be required to pay National Insurance. For 2025/26 the annual tax-free personal allowance is £12,570, anything above this amount will be taxed according to the following (if you live in England, Wales, or Northern Ireland):

• Basic rate - 20% between £12,571 and £37,700
• Higher rate - 40% between £37,701 and £125,140
• Additional rate - 45% above £125,140

Dividends:Dividends are a share of the profits that are paid to shareholders as a return on their investment, however, the company must be making a profit to pay dividends. A tax-efficient option that directors often use to remunerate themselves is via the combination of a basic salary and dividends. Dividends are a distribution of the after-tax profits made by the company, and whilst Income Tax is payable on the dividends received, the rates are significantly lower than the Income Tax rates for a salary and there is also no National Insurance charge to be paid on dividends.

By taking dividends, you will also be able to take advantage of the tax-free Dividend Allowance – currently £500 per tax year. As a basic rate taxpayer, you will pay tax on your dividends at a rate of 8.75%, and as a higher rate taxpayer, you will pay 33.75%. You will need to add your total dividend income for the year to your other income in order to work out your tax band.

Other income:It also may be beneficial to consider utilising other income methods, such as charging rent on a commercial property or charging licence fees. These need to be carefully considered, and balanced with the other tax implications, so it is always recommended that you seek professional advice in relation to your specific circumstances.

Why do I need to keep my accountant informed?

If you plan to change your pay structure, change the benefits you receive from your company, or expect to receive income from a different source, then do make sure you run your plans past your accountant. Decisions like this without professional advice can cost a lot in tax, particularly if extra income/benefits put you into a higher rate tax bracket or mean that you lose your Personal Allowance.

Also, if you claim Child Benefit, extra unplanned income could mean incurring the High-Income Child Benefit Charge. To ensure you are staying as tax efficient as possible, now more than ever it is important to work closely with your advisers and to consider the tax rates that will be applicable to the Company and if the current remuneration strategy still holds up in the current regime. It is important to consult with tax professionals or financial advisors who specialise in Owner Managed Businesses.

They can provide tailored advice based on your specific business structure and financial goals. Our tax consultants are extremely experienced and knowledgeable in this field, with nearly 50 years of experience in taxation and working with top legal specialists. Our approach to profit extraction is specifically developed and designed with business owners in mind.

To speak to one of our advisers to discuss the most efficient ways of remuneration, please fill out the below form:

Tax affairs are complicated, and we would always advise you to speak with your advisers before making any changes.  For more information on how we can help you and your business please contact us via email or call and we will be happy to advise on the best solutions for your business.

Please note: This article is provided for information only and was correct as at the time of writing (10/04/25). Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance.  No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.