Salary vs Dividends: What’s the Best Way to Pay Yourself as a Director?

When you run a limited company, one of the biggest questions you’ll face is this:

“Should I pay myself through salary, dividends, or a mix of both?”

It’s a common area of confusion — and rightly so.
Both come with different tax rules, different advantages, and different implications for your business.

In this guide, we break down how salary and dividends work, the pros and cons of each, and how many directors choose to structure their pay in a tax-efficient way.

What’s the Difference Between Salary and Dividends?

Salary

A salary is treated just like any other employee wage. You pay it through PAYE and it’s subject to:

• Income Tax

• National Insurance Contributions (NICs)

• Employer NICs (if applicable)

A salary counts as an allowable business expense, helping reduce your corporation tax bill.

Dividends

Dividends are payments you take as a shareholder, not as an employee.
They can only be paid from company profits after tax.

You don’t pay NICs on dividends, which is why they are often considered more tax-efficient than salary.
However:

• They are not business expenses

• They don’t reduce corporation tax

• You must have enough retained profit to take them

Why Most Directors Use a Mix of Both

Most small business directors choose a combination:

• A small salary (often at the tax-efficient threshold)

• Top-up dividends from company profits

Why?

Because this approach can:

• Reduce NICs

• Maintain qualifying years for the State Pension

• Keep access to maternity pay, sick pay, and other benefits

• Maximise tax efficiency overall

Salary: The Advantages & Disadvantages

✔ Advantages

1. Reduces your corporation tax
Because salary is an allowable expense, it lowers your company profit and corporation tax bill.

2. Ensures State Pension qualifying years
Your salary contributes towards your National Insurance record.

3. Helps with mortgages & lending
Lenders tend to prefer documented PAYE income.

✘ Disadvantages

1. You pay NICs
Both employer and employee NICs can make salary more expensive.

2. More admin
You must run payroll properly through PAYE.

3. Less tax-efficient at higher amounts
Once you pass the basic allowance, salary becomes more expensive than dividends.

Dividends: The Advantages & Disadvantages

✔ Advantages

1. No National Insurance payable
Your take-home pay is often significantly higher.

2. Lower tax rates
Dividend tax rates are lower than PAYE income tax.

3. Flexible
You can take dividends only when the business has profits available.

✘ Disadvantages

1. Must come from profit
You can’t take dividends if your company hasn’t made a profit.

2. Not a business expense
Dividends do not reduce your corporation tax.

3. Lenders don’t always like dividend-heavy income
Especially for mortgages.

Example: Salary vs Dividend (Simple Breakdown)

Let’s assume you want to pay yourself £30,000.

Scenario 1 — Salary Only

You’d pay:

• NICs

• Income tax

• Employer NICs

• More PAYE admin

Result: Higher tax bill, lower take-home.

Scenario 2 — Salary + Dividends

• Minimal salary

• Top-up dividends

Result: Much lower tax bill, far higher take-home pay.

Which Is Best?

There is no one-size-fits-all answer.
It depends on:

• Your profit levels

• Tax thresholds

• Personal income

• Cashflow

• Company structure

• Long-term goals

But for most owner-managed limited companies:

👉 A small salary + dividends = the most tax-efficient blend.

If you’re unsure how to structure your pay, speak to your accountant — or ask us and we’ll guide you through it in plain English.

Try Our Dividend Tax Calculator

To help you work out what your dividend tax might look like, try our free calculator on this page.

It gives you a rough estimate of:

• Your taxable dividend amount

• Your estimated dividend tax

• Your estimated net take-home

It’s simple, fast, and built for small business owners.