Directors are often the lucky ones who get the freedom to decide how they are paid and how they structure their income.
Most opt for a mix of a salary and dividends, as this can be the most tax-efficient approach.
However, dividend rates are going up and Income Tax thresholds are frozen until 2031, so you might want to double-check that your income remains structured as efficiently as possible.
Paying yourself a salary can reduce your Corporation Tax liabilities and maintain National Insurance records for State Pension purposes.
Salaries can also be considered an allowable business expense and be deducted from company profits before calculating Corporation Tax.
Many directors choose a salary based around certain thresholds, such as £6,500 to secure National Insurance credits or £12,570 to fully utilise the personal allowance without triggering Income Tax.
However, if your earnings go above the Personal Allowance, Income Tax will apply.
The current Income Tax rates are:
| Basic rate | 20 per cent | On earnings from £12,571 to £50,270 |
| Higher rate | 40 per cent | On earnings from £50,271 to £125,140 |
| Additional rate | 45 per cent | On earnings over £125,140 |
Also, if your salary goes above certain levels it can result in employee and employer National Insurance contributions and this will increase the overall costs to your business.
Dividends are treated as a top-up to your income and the tax rates are increasing in the 2026/27 tax year.
From April 2026, the new dividend tax rates are:
| Basic rate | 10.75 per cent | On earnings from £12,571 to £50,270 |
| Higher rate | 35.75 per cent | On earnings from £50,271 to £125,140 |
| Additional rate | 39.35 per cent | On earnings over £125,140 |
Although rising taxes don’t seem good, taking dividends alongside a salary is still more tax-efficient than taking a salary alone.
This is mainly because dividends are not subject to National Insurance and the tax rates are significantly lower than those for Income Tax.
However, you must ensure your company is performing well enough to provide these dividends, as they can only be paid from retained profits after Corporation Tax.
You also need to ensure that you are declaring your dividends properly with the right documentation and reporting them through your Self-Assessment tax return.
Trying to find that right balance between dividends and your salary can feel overwhelming and the changing dividend rates can add to that pressure.
That’s why our team are on hand to review your salary and dividend strategies and ensure your income is structured as efficiently as possible.
We will also assess that you are declaring your pay properly, so you can continue to reap the rewards and not stress about any compliance issues arising.
For further advice on dividends and paying yourself, contact our team today.
