For many years, company owners were told one simple thing:
“Dividends are better than salary.”
And for a long time, that advice often held true. But tax rules don’t stand still — and recent changes mean that paying yourself through dividends alone doesn’t always deliver the clear tax savings it once did.
That doesn’t mean dividends are no longer useful. It simply means that the balance between salary and dividends now deserves a fresh look.
What’s changed?
Over recent years, dividend tax rates have increased, while many other tax thresholds have remained largely unchanged. As a result, the gap between the tax cost of salary and dividends has narrowed.
In some cases, the difference is now modest. In others, a salary can work just as well — or occasionally better — than dividends, depending on your circumstances.
Salary and dividends – in plain English
Most company owners take money from their business in one (or a mix) of the following ways:
Salary
A salary works much like it does for any employee:
- Paid regularly through payroll
- Subject to Income Tax and National Insurance
- Counts towards your State Pension and other benefits
- Can be helpful when applying for a mortgage or other borrowing
Dividends
Dividends are paid from company profits:
- No National Insurance to pay
- Taxed at lower rates than salary (although those rates have risen)
- Only payable if the company has sufficient profits
In the past, dividends were usually the obvious winner from a tax point of view. Today, the picture is more balanced.
Why there’s no “one‑size‑fits‑all” answer anymore
The most tax‑efficient way to pay yourself now depends on your individual situation, including:
- How much profit your company makes
- Whether you have other sources of income
- How close you are to higher tax bands
- Your longer‑term plans (for example, borrowing, retirement, or reducing working hours)
- Whether your company is entitled to claim the National Insurance Employment Allowance
Two business owners with very similar companies can end up with very different “best” answers.
Our approach
Rather than relying on old rules of thumb, we believe it’s important to review how you take money from your business to make sure it still suits both current tax rules and your personal plans.
Based on our previous assessments, your current mix of salary and dividends has been structured to achieve an efficient overall tax position. While recent changes to tax rates and thresholds may create some differences between salary and dividend outcomes, these are generally modest in most cases.
We will naturally review each client’s profit extraction strategy as part of preparing their accounts over the coming year. However, if you feel there is a more urgent need to revisit your position, please don’t hesitate to get in touch.
If you’d like us to take a closer look, we’re always happy to help.