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

As a small business owner or company director, how you extract profits from your limited company can make a big difference to your overall tax bill and financial wellbeing. Should you take a salary, dividends, or a combination of both?

With new tax rules now in effect for the 2025/26 tax year, it’s the perfect time to review your remuneration strategy.

In this article, AWR Accountants – trusted tax advisers for small businesses across the UK – explore the pros and cons of each option, including key tax changes, and help you decide what’s right for you.

What’s Changed in 2025/26?

1. Dividend Reporting Requirements

From April 2025, if you’re a director receiving dividends from your own limited company, you must now declare them on the employment pages (SA102) of your Self Assessment return. You’ll also need to disclose your percentage shareholding in the business.

2. Self-Employment Disclosure Rules

HMRC now requires all self-employed individuals to report start and end dates for self-employment. This will likely appear on the SA103 pages and could be used by HMRC to determine employment status – something that could trigger compliance checks if not handled carefully.

3. Changes to Employers’ National Insurance

• The employers’ NI threshold has dropped to £5,000 (from £9,100).
• The employers’ NI rate has increased to 15%.
• The Employment Allowance has doubled to £10,500 and is now available to more businesses.

Note: You must have at least two directors/employees over the threshold to claim Employment Allowance. Single-director companies aren’t eligible.

Salary vs Dividends: Which Is Better?

Salary:

• ✅ Reduces corporation tax
• ✅ Counts as qualifying income for state pension
• ✅ Helps with mortgage applications
• ✅ Provides stable monthly cash flow
• ❌ Subject to Income Tax and National Insurance
• ❌ Higher cost to the company if NI allowance can’t be claimed

Dividends:

• ✅ Lower tax rates than salary
• ✅ Not subject to National Insurance
• ✅ Can offer greater take-home pay
• ❌ Only payable from retained profits
• ❌ Less regular income – paid as lump sums
• ❌ £500 dividend allowance limit for 2025/26

Real-Life Example: Profit Extraction on £150,000

Let’s say your company has £150,000 profit before paying yourself. You’re a sole director with no other employees and no other income. Here’s a simplified comparison:

Key takeaway: Dividends provide more take-home pay, but salaries preserve more for future investment. A balanced approach may work best.

Four Tips to Plan Ahead in 2025/26

To optimise your profit extraction strategy, follow these expert tips from AWR Accountants:

1. Forecast your company profits – dividends rely on available profits.
2. Set a tax-efficient salary based on the £5,000 NI threshold.
3. Balance personal and business needs – consider future investments.
4. Review quarterly – adapt your strategy as your business performance evolves.

⚠️ Warning: Don’t take dividends unless you have enough retained profits. Otherwise, they may be treated as director’s loans and taxed accordingly.

Need Personalised Tax Advice? Speak to AWR Accountants

At AWR Accountants, we help company directors and small business owners across the UK extract profits from their limited companies in the most tax-efficient way possible. Our tailored advice considers your goals, company structure, and cash flow needs.

• ✅ Local accountants in Derby
• ✅ Experts in limited company tax planning
• ✅ Fixed-fee packages and ongoing support

📞 Ready to Take Home More from Your Business?

Let’s review your salary and dividend strategy for 2025/26.

Contact AWR Accountants today to arrange your free initial consultation:

• 📞 Call us on 01332 340050
• 🌐 Visit www.awraccountants.co.uk
• 📧 Email us at info@awraccountants.co.uk