Dividend vs Salary: What’s the Most Tax-Efficient Way to Pay Yourself in 2025/26?

If you run a limited company in the UK, one of the most common questions you’ll face is: Should I pay myself a salary, dividends, or a mix of both? The right answer can significantly impact how much tax you pay and how much you take home.

With the 2025/26 tax year well underway, it’s a good time to review your approach. This article breaks down the differences between salary and dividends, recent tax changes, and how to make the most tax-efficient choice.

1. Understanding the Basics

Salary: This is a regular wage paid through PAYE (Pay As You Earn). It's treated as an allowable expense for your company and subject to Income Tax and National Insurance Contributions (NICs).

Dividends: These are payments made to shareholders from company profits after Corporation Tax. They are not classed as business expenses and are taxed separately at dividend rates.

2. Key Tax Rates for 2025/26

Type	Rate/Threshold
Personal Allowance	£12,570 (no tax up to this amount)
Basic Income Tax (Salary)	20% on income £12,571–£50,270
Employee NICs	8% (on earnings above £12,570)
Dividend Allowance	£500 (tax-free dividends)
Dividend Tax Rate (Basic)	8.75% (on income up to £50,270 incl. salary + dividends)

(Higher and additional rate thresholds also apply.)

3. Pros and Cons of Salary

Advantages:

• Builds qualifying years for State Pension.

• Can contribute to pension schemes and other employee benefits.

• Reduces Corporation Tax (as it’s a deductible expense).

Disadvantages:

• Subject to Income Tax and NICs.

• Adds admin via payroll and RTI submissions to HMRC.

Best for: Those needing pension contributions, maternity pay, or access to mortgage lending (as some lenders prefer salaried income).

4. Pros and Cons of Dividends

Advantages:

• Lower tax rates than salary.

• No NICs payable.

• More flexible — can be taken when profits allow.

Disadvantages:

• Can only be paid from after-tax profits.

• No pension or state benefit contributions.

• Subject to Corporation Tax first, then dividend tax.

Best for: Company directors who want to maximise take-home pay and have flexibility with how and when they extract profits.

5. What's the Most Tax-Efficient Option in 2025/26?

For most limited company directors, the optimal setup is a combination of a low salary and the rest in dividends.

Example strategy (2025/26):

• Take a salary at or just above the NIC threshold (£12,570) to preserve State Pension eligibility without paying NICs.

• Take the remainder of income as dividends, staying within the basic rate band if possible to avoid higher rates.

This structure minimises both personal tax and Corporation Tax liabilities while keeping you compliant with HMRC.

6. Other Considerations

• Pension Planning: Salaries can be used to make tax-efficient pension contributions.

• Mortgage Applications: Some lenders favour salary over dividends.

• Profit Availability: Dividends can only be paid if the company is in profit.

• IR35 Rules: If you're a contractor, your situation may be affected by off-payroll working rules.

Final Thoughts

There’s no one-size-fits-all approach. The best strategy depends on your income needs, business performance, and personal goals. However, using a blend of salary and dividends remains the most tax-efficient approach for many UK company directors in 2025/26.

At Highway 61, we help limited company owners optimise their remuneration plans while staying fully compliant. If you’d like tailored advice based on your situation, we’re here to help.

Need help deciding how to pay yourself? Contact Highway 61 today for a personalised tax planning review.