Whether to pay yourself through salary or dividends remains one of the most important tax-planning decisions for SME owners. It can have a big impact on your tax bill and overall financial resilience.
Without knowing the details of your business set up, we can look at both options to help you decide which is best for you.
Salary is subject to income tax and national insurance; the amount taken determines whether you fall into the 20%, 40%, or 45% tax bands. Employer NICs have become more expensive: from April 2025, employers pay NICs at 15%, increasing the cost of higher PAYE salaries. Salary costs reduce your profit and thus corporation tax payable.
Dividends are paid after corporation tax on company profits, are not subject to national insurance and have lower tax rates than salary: 10.75% (basic rate), 35.75% (higher rate), 39.35% (additional rate). The dividend allowance has been reduced over recent years to just £500, making dividends less attractive than before.
A common approach is to use a hybrid of both options: Take a salary around the personal allowance (£12,570) and supplement the rest of your income with dividends. This aims to balance tax efficiency with access to state benefits and pension contributions.
Please do get in touch to discuss your options further as there are other aspects to take into consideration.
