Post: Director’s Salary vs Dividends: What’s More Tax Efficient?

One of the key decisions UK company directors face is how to pay themselves: via salary, dividends, or a combination of both. The method you choose can significantly impact your tax liability, National Insurance contributions, and company cash flow.

In this article, we compare director’s salary and dividends in terms of tax efficiency, control, and compliance. Dragonfly Associates provides tailored advice and payroll support based on your chosen structure, subject to agreement.

What’s the Difference Between Salary and Dividends?

A salary is a fixed payment made by your company to you as an employee or director. It’s subject to:

• PAYE income tax
• Employee National Insurance
• Employer National Insurance

Dividends are payments made from a company’s post-tax profits to its shareholders. They are not treated as business expenses and are taxed at different (often lower) rates.

To receive dividends, you must:

• Be a shareholder of the company
• Have sufficient retained profits
• Properly declare and minute the dividend payment

Option 1: Paying Yourself a Salary

Pros:

• Qualifies for state pension contributions and personal allowances
• Offers consistent income and easier mortgage/loan applications
• Reduces Corporation Tax (as salary is an allowable expense)

Cons:

• Subject to income tax and National Insurance
• Requires PAYE registration and regular payroll filings
• Less tax-efficient at higher income levels

We assist directors in setting up payroll and calculating optimal low-salary thresholds, depending on your overall compensation strategy.

Option 2: Paying Yourself Through Dividends

Pros:

• Typically more tax efficient than salary at higher income levels
• No National Insurance contributions
• Flexibility to issue when cash flow allows

Cons:

• Only payable from retained profits (after Corporation Tax)
• Must be declared properly via board minutes
• Doesn’t qualify for pension or employment benefits
• Cannot be used to reduce Corporation Tax

Dragonfly Associates helps ensure dividends are declared in line with HMRC guidelines and documented appropriately.

Combined Approach: The Most Common Strategy

Most directors choose a hybrid approach:

• Pay a low salary (typically between £9,000–£12,570/year) to stay below or near tax/NIC thresholds
• Top up with dividends to benefit from lower personal tax rates

This method offers balance between tax efficiency, pension eligibility, and compliance. We calculate and manage this structure for clients under our payroll and tax service plans.

Tax Comparison Example (2025/26 rates)

Director taking:

• £12,570 salary (below income tax threshold)
• £30,000 in dividends

Approximate personal tax due:

• £0 income tax on salary
• ~£1,450 tax on dividends after allowance
• No National Insurance (salary below threshold)

Compared to full salary equivalent, this approach can yield thousands in tax savings annually, subject to compliance and cash availability.

Compliance Considerations

• PAYE must be operated for salaries
• Dividends must be from actual profits—not anticipated revenue
• Dividend payments must be supported by board minutes and vouchers
• All payments must be recorded properly in company and personal accounts

Dragonfly Associates provides end-to-end support for director remuneration, helping you remain tax-efficient and compliant.

Frequently Asked Questions

Can I take only dividends and no salary?

Yes, but this may not be optimal. You miss out on pension credits and may attract HMRC scrutiny. We advise a balanced approach.

Are dividends taxed through PAYE?

No. Dividends are reported via your personal Self Assessment return and taxed separately from salary.

Do I need to run payroll for a low salary?

Yes. Even low salaries must be processed through PAYE and reported to HMRC. We handle this on your behalf where applicable.

Optimise Your Director Pay with Expert Support

Choosing the right mix of salary and dividends can make a meaningful difference in your take-home pay and long-term planning. But it must be done correctly to avoid penalties or HMRC audits.

Dragonfly Associates offers personalised director remuneration guidance, payroll setup, and dividend compliance—subject to agreement and your selected support plan.

To discuss the most efficient way to pay yourself, contact our team today.