Salary vs dividends: paying yourself from your limited company
The classic director question. With the dividend allowance at £500 and employer NI changes from April 2025, the optimal mix has shifted — here is how to think about it.
If you run your own limited company, the way you pay yourself changes your tax bill by thousands of pounds a year. The broad answer has not changed — a modest salary plus dividends usually wins — but the details shift almost every Budget.
The current landscape
- Dividend allowance — just £500 of dividends tax-free
- Dividend tax rates — 8.75% (basic rate), 33.75% (higher), 39.35% (additional)
- Employer National Insurance — 15% on earnings above £5,000 since April 2025
- Employment Allowance — £10,500 for eligible employers, wiping out employer NI for many small companies with staff
The usual shape of an optimal mix
A small salary (typically around the personal allowance or NI threshold, preserving your State Pension record) with the balance as dividends. Dividends carry no National Insurance and are taxed at lower rates — but they can only be paid from post-tax profits, and all shareholders of the same class must receive them equally.
When the usual answer is wrong
There is no universal optimum. We model salary vs dividends for each director annually — it takes minutes with real numbers and can save a meaningful amount every year.
- Loss-making or low-profit years — dividends may not be lawful
- Mortgage applications — lenders often prefer salary evidence
- Benefits, student loans and child benefit taper all interact with the choice
Sources and further reading
- GOV.UK — Tax on dividends
- GOV.UK — Rates and thresholds for employers (National Insurance)
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