Dividend vs Salary Optimiser

Most UK company directors take a combination of salary and dividends rather than either alone. Salary is a deductible business expense that reduces corporation tax, but it attracts income tax and National Insurance on both sides of the payroll. Dividends are paid from post-tax profit (so no corporation tax deduction) and carry lower dividend tax rates, but there is no NI on dividends.

The optimal strategy for most directors involves taking a salary equal to the personal allowance (£12,570 in 2025/26), just enough to preserve the National Insurance credit for state pension entitlement without triggering income tax. The remainder of the desired income is then drawn as dividends, using the £500 dividend allowance before dividend tax at 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate).

The October 2024 Budget increased employer National Insurance from 13.8% to 15%, effective April 2025, and reduced the secondary threshold from £9,100 to £5,000. This makes salary more expensive for the company at lower levels — strengthening the case for the personal-allowance salary strategy.

The optimal split shown here uses the personal allowance as the salary benchmark — appropriate for most directors with no other employment income. Your actual optimum depends on pension contributions, other income sources, the Employment Allowance, and whether you have non-director employees.