Salary vs dividends: Taking income from your company

What’s the most tax-efficient way for company directors to take income?

If you run a company (even as a one-person contractor), there are three different ways you can choose to pay yourself: a salary, dividends or pension contributions.

In particular, we’ll look at the tax advantages of dividends and pension contributions, along with the limitations of these forms of remuneration.

If you work as a contractor, it's worth checking whether IR35 rules apply. Under IR35, some freelancers may be taxed as employees, paying income tax and national insurance, but without receiving employment benefits, such as holiday or sick pay. 

If you operate outside IR35, you can pay yourself more tax-efficiently.

Should I take a salary or dividends from my company?

Most directors of limited companies pay themselves in some combination of salary and dividends, often supplemented by pension contributions from the company.

Finding the right combination for you will depend on a number of factors, such as

• The company’s profits

• How much you want to reduce your personal tax bill

• How much you want to reduce the company’s tax bill

• Whether you want to retain certain state benefits (e.g. maternity benefits or state pension)

Should I take a salary from my company?

As a director, it’s a good idea to take at least a small salary from your company, which means putting yourself on your company’s payroll.

There are several benefits of taking part of your income as salary.

The benefits of taking a salary

• You build up qualifying years towards your state pension (you need 35 for the full state pension).

• You can make higher personal pension contributions.

• You can retain maternity benefits.

• It can be easier to apply for things like mortgages and insurance policies, such as critical illness cover.

• You reduce the amount of corporation tax that your company pays (as salary is an allowable business expense).

• You can take a salary even if your business makes no profit.

There are, however, several drawbacks to taking a salary, particularly a large one.

The drawbacks of taking a salary

• Taking a salary means that both you and the company have to pay national insurance contributions (NICs).

• A salary also attracts higher rates of income tax than dividends.

How do I decide how much salary to take?

You don’t pay income tax on your earnings until you exceed the personal allowance (currently £12,570 in the 2025/26 tax year). 

However, you will have to pay NICs if your income passes the NIC primary threshold (currently £12,570).

In the 2025 Autumn Budget, it was announced that both thresholds will be frozen until April 2031.

In addition, following the Autumn Budget in 2024, from 6 April 2025, employer NICs are payable on any employee earnings above £5,000 rather than the previous threshold of £9,100.

This does not impact other employer NIC thresholds, such as the apprentice upper secondary threshold or the upper secondary threshold for employees under 21.

Note that to build up qualifying years for the state pension, your salary must be at or over the NIC lower earnings limit (currently £6,500 in the 2025/2026 tax year).

Some directors, therefore, set their salaries between the lower earnings limit and the primary threshold to maintain their state pension, but avoid paying national insurance.

Should I take dividends from my company?

Many directors choose to take the majority of their income in the form of dividends, as this is usually more tax-efficient.

What are dividends?

A dividend is simply a share of the company’s profits. Profit is what is left over after the company has settled all its liabilities, including taxes. If there is no profit, then no dividends can be paid.

Dividends can be paid to directors and other shareholders, according to the proportion of shares that they hold. There is no requirement to pay all the profits as dividends, or even any of them.

A company can retain profits over a number of years and distribute them as the board decides.

The benefits of taking dividends

• You pay less income tax on dividends than on salary.

• There’s no national insurance (for employee or employer) on dividends.

• By taking most of your income in the form of dividends, you can significantly reduce your income tax bill.

Your dividend allowance

Everyone has a tax-free dividend allowance, which is in addition to their personal allowance. In the 2025/26 tax year, this allowance is £500.

This means that you can earn up to £13,070 before paying any income tax at all.

Income tax rates on dividends

Dividends attract a much lower rate of income tax than a salary does.

There is also a slightly greater tax-free allowance when you are paid in dividends.

Here is a comparison table:

In the 2025 Autumn Budget, it was announced that the basic and higher rate of dividend tax will rise by 2% from April 2026.

The dividend tax rate for additional-rate taxpayers will remain unchanged.

The drawbacks of taking dividends

Although taking your income mostly in the form of dividends may seem like a no-brainer, there are certain limitations and pitfalls to watch out for.

• Dividends can only be paid out of profits. 

• Relying too heavily on dividends can make your income unpredictable.

• Dividends are paid after corporation tax has been deducted (unlike salary, which is a tax-deductible expense).

• If you accidentally take a dividend that is not covered by profits, you will have inadvertently taken out a director’s loan, which must be repaid.

• Dividends don’t count as ‘relevant UK earnings’ for the purposes of tax relief on pension contributions that you make yourself (see below).

If you plan to rely on dividends for some or most of your income, then ensure you have a rigorous accounting function in place to declare profits and account for dividends in good time.

A qualified accountant can also help you work out which method of payment is most tax-efficient for both yourself and your company, as this can be quite convoluted.

Can you receive pension contributions directly from your company?

A third possible way to receive tax-efficient remuneration is by making pension contributions directly from your company.

This is different from contributing to your pension yourself, as it counts as an employer pension contribution.

The benefits of making employer pension contributions

• Pension contributions don’t add to your income, so they don’t increase your tax bill.

• They are an allowable business expense, saving you money on your corporation tax bill.

• There are no employer NICs to pay, potentially saving you more money.

• Employer pension contributions are subject to the annual allowance, but are not limited by the size of your salary.

The last point above is an important one.

As an individual, you are not allowed to pay more into a pension than your salary for that year. Therefore, if you are taking a small salary plus dividends (as discussed above), then you won’t be able to pay very much into your pension.

However, employer pension contributions are not limited in this way. They are limited only by the annual allowance (currently £60,000).

So your company can contribute up to this amount into your pension, even if you are on a small salary.

This won’t boost your finances in the short term, but it will make you feel better off in retirement.

The drawbacks of taking employer pension contributions

The main downside of taking remuneration in the form of pension contributions is the obvious one: you can’t access your pension until you are at least 55 (rising to 57 from April 2028).

So, pension contributions can’t be a substitute for salary or dividends, just a welcome addition to them.

Talk to your accountant about the most tax-efficient ways for you to pay yourself from your company.

Get expert financial advice

When deciding between dividends and salary, it's crucial that you consider your company's profits, personal financial goals, and overall tax efficiency.

While dividends often provide tax advantages, a balanced approach that includes a small salary and pension contributions can offer additional benefits.

Always consult with an accountant to tailor the best strategy for your unique situation, ensuring you maximise tax efficiency and maintain financial stability.

Let Unbiased match you with a qualified accountant to expertly navigate the complexities of dividends versus salary and help you achieve your financial goals.