Are you a director of a limited company, and ever asked yourself: Should I take a salary, dividends, or a mix of both?

It’s a common question we’re asked at Whittaker & Co – especially at the start of a new tax year. With several updates to tax legislation now in effect, this is a good time to review your approach.

Key tax changes to be aware of

As of April 2025, HMRC introduced new rules that may impact your decision:

• Dividend reporting requirements: Directors who receive dividends from their own companies must now report them under the employment section (SA102) of their Self-Assessment return, not the usual dividend section. You must also disclose your percentage shareholding.
• Self-employment reporting: If you start or stop any self-employment, you’ll be expected to report this. HMRC is tightening up on employment status, particularly when an individual appears to act as an employee despite being self-employed on paper.
• National Insurance changes: Employers’ Class 1 NI is now due on earnings above £5,000 (down from £9,100) and the rate has increased to 15%. However, the Employment Allowance has doubled to £10,500 and is no longer limited by employer size.
  • Only claimable if your company has at least two employees or directors earning above the threshold.
  • If you operate more than one company, you can only claim the allowance once across all payrolls.

Salary vs Dividends?

Salary:

• Tax-deductible for the company (reduces Corporation Tax).
• Subject to PAYE income tax and National Insurance.
• Counts towards state pension and mortgage applications.
• Predictable monthly cash flow.

Dividends:

• Not tax-deductible for Corporation Tax purposes.
• Paid from company profits after tax, so only available if sufficient retained earnings exist.
• No NI contributions due.
• The dividend allowance remains at £500 for the 2025/26 tax year.

So, which is more tax-efficient?

To help you understand the difference,  below is an example.

Imagine a limited company with a profit of £150,000 before paying the director any salary. This company has no other employees, and the director has no other income. In this scenario, there are two common ways the director might choose to take money out of the company:

1. Low salary (just above NI threshold) + dividends
2. Higher salary through PAYE, less reliance on dividends

Both options qualify for state pension entitlement, and both allow for mortgage applications. But the net take-home pay and retained company profit can differ significantly.

• Dividends usually provide higher personal income, although total tax liabilities may be slightly higher.
• Salary-heavy approaches reduce Corporation Tax and keep more profit inside the company, which is potentially useful if you plan to reinvest or grow the business.

What’s the right approach for you?

There’s no one-size-fits-all solution. The best method depends on:

• Your income needs
• Your company’s profit levels
• Future investment plans
• Cash flow requirements
• Mortgage or lending applications

Many directors find that a combination of salary and dividends offers the most flexibility and efficiency.

Four things to consider this year:

1. Forecast your annual profits – Your ability to take dividends depends on having enough post-tax profits.
2. Check your salary level – Paying above the NI threshold can be beneficial, but don’t overdo it if it means unnecessary tax.
3. Plan your dividends carefully – Only pay dividends if you have profits to support them, or you could end up with an overdrawn director’s loan account.
4. Review quarterly – Circumstances and profits can change throughout the year. Adjust your approach as needed.

How you pay yourself as a director should always be tailored to your business and personal goals. Whether it’s through salary, dividends, or a mix of both, the right balance can make a real difference to your tax position and long-term plans.

If you’re unsure what approach is best for you, get in touch. We’re here to help you make an informed and tax-efficient choice.

For more information – Running a limited company: your responsibilities: Taking money out of a limited company – GOV.UK

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