Should I take salary or dividends from my limited company?
Most limited company directors take a mixture of salary and dividends, but the best split is not the same for every company. Salary can reduce Corporation Tax and help protect National Insurance entitlement, but it may create PAYE and National Insurance costs. Dividends are usually taxed differently and do not attract National Insurance, but they can only be paid from company profits after Corporation Tax.
GOV.UK’s tax on dividends guidance explains how dividend income is taxed.
GOV.UK’s National Insurance guidance for company directors explains that directors are classed as employees and pay National Insurance on annual salary and bonuses over the relevant threshold.
Merranti’s Corporation Tax guide is a useful starting point because salary and dividends affect both the company’s Corporation Tax position and the director’s personal tax position.
Why directors use salary and dividends
A limited company is separate from its director.
That means money in the company bank account is not automatically the director’s personal money.
A director normally takes money from a company through one or more of these routes:
salary
dividends
expense reimbursements
director’s loan repayments
pension contributions
benefits in kind
Salary and dividends are the two most common extraction methods.
Salary is paid through payroll. It is usually deductible for Corporation Tax if it is wholly and exclusively for the company’s trade.
Dividends are paid to shareholders from profits after Corporation Tax. They are not a company expense.
This difference matters.
A £10,000 salary may reduce the company’s taxable profit. A £10,000 dividend does not.
But salary can create Income Tax, employee National Insurance and employer National Insurance. Dividends do not create National Insurance, but they are taxed under dividend tax rules.
How salary works for a company director
A director’s salary is employment income.
If a company pays a director a salary, the company usually needs to operate PAYE, report payroll to HMRC, and deduct tax and National Insurance where required.
GOV.UK’s National Insurance for company directors guidance explains that directors are classed as employees and pay National Insurance on annual income from salary and bonuses over £12,570.
The company may also pay employer National Insurance on directors’ salaries.
GOV.UK’s National Insurance rates and categories guidance explains the employee and employer National Insurance rates for the 2026/27 tax year.
Salary can be useful because it may:
use the director’s Personal Allowance
reduce company profit for Corporation Tax
help maintain National Insurance entitlement
create a regular income record
support mortgage or lending applications
allow pension contributions to be planned through payroll
However, salary is not automatically best at any level.
Once salary rises above relevant thresholds, tax and National Insurance can reduce the benefit.
How dividends work
Dividends are distributions of company profit to shareholders.
A company can only pay dividends if it has enough distributable profits. This usually means profits after Corporation Tax, based on the company’s accounts and reserves.
GOV.UK’s tax on dividends guidance explains that dividend income is taxed separately from salary and that the dividend allowance for 2026/27 is £500.
For 2026/27, dividend tax rates are:
10.75% for basic rate taxpayers
35.75% for higher rate taxpayers
39.35% for additional rate taxpayers
These rates apply to dividends above the dividend allowance and after considering the director’s wider tax position.
Dividends can be attractive because they do not attract National Insurance.
But dividends are not a substitute for salary.
They are paid to shareholders, not employees. They need company profit, proper approval and dividend paperwork.
Merranti’s guide on how directors accidentally create tax bills is relevant because informal withdrawals are often wrongly assumed to be dividends.
Dividends must be legal
A dividend should not be treated as a casual bank transfer.
The company should have enough distributable profit at the time the dividend is declared.
The dividend should also be documented.
This usually means:
checking available profit
recording the dividend decision
preparing dividend vouchers
paying dividends in line with shareholdings unless there is a valid reason not to
keeping records with the company books
If a director takes money and there is not enough profit to support a dividend, the withdrawal may need to be treated as a director’s loan.
That can create separate tax issues.
Merranti’s director’s loan guide is useful because director loans can trigger Section 455 tax, benefit in kind issues and cash-flow problems if they are not cleared properly.
Salary reduces Corporation Tax but dividends do not
This is one of the main reasons salary and dividends need to be compared properly.
Salary is usually an allowable company expense where it is paid for the company’s trade and reported correctly through payroll.
Dividends are paid from post-tax profits.
That means a salary can reduce Corporation Tax, but a dividend does not.
GOV.UK’s Corporation Tax rates guidance explains that Corporation Tax depends on company profits.
For 2026, GOV.UK lists the small profits rate at 19%, the main rate at 25%, and marginal relief between £50,000 and £250,000 for companies that qualify.
Merranti’s Corporation Tax marginal relief guide is useful because directors often assume their company pays a simple 19% or 25%, when profits in the marginal relief band can create a more complicated effective rate.
The Corporation Tax saving from salary may be stronger where the company is paying Corporation Tax at a higher effective rate.
But that does not automatically mean the director should take a much larger salary.
You also need to consider employee National Insurance, employer National Insurance, dividend tax, personal allowance, pension planning, and the company’s cash flow.
National Insurance changes the answer
National Insurance is often the reason directors do not simply take all income as salary.
A salary can create:
employee National Insurance
employer National Insurance
PAYE reporting
possible pension auto-enrolment duties
cash-flow obligations to HMRC
GOV.UK’s National Insurance rates and categories guidance lists the 2026/27 rates and thresholds.
For many owner-managed companies, the optimum salary is often calculated around National Insurance thresholds, Corporation Tax relief and whether Employment Allowance is available.
Employment Allowance can change the result.
GOV.UK’s Employment Allowance guidance explains that a company with only one director cannot claim Employment Allowance if that director is the only employee liable for secondary Class 1 National Insurance.
This is why one-director companies and companies with employees may have different optimal salary levels.
A one-person company may use a different salary strategy from a company with staff and Employment Allowance available.
The dividend allowance is now small
The dividend allowance is no longer large enough to drive the whole salary-versus-dividend decision by itself.
For 2026/27, the dividend allowance is £500.
GOV.UK’s tax on dividends guidance confirms that you only pay tax on dividends above the dividend allowance, but the allowance is now modest.
That means most directors taking meaningful dividends will pay dividend tax.
The decision is no longer as simple as “take dividends because they are tax-free”.
They usually are not.
The better question is whether the combined company tax and personal tax position is better with salary, dividends, pension contributions, or a mixture.
Watch the Personal Allowance
Salary and dividends both count as income when working out the director’s wider tax position.
For 2026/27, the standard Personal Allowance is £12,570.
GOV.UK’s Income Tax rates and allowances guidance explains that the Personal Allowance is reduced by £1 for every £2 of income above £100,000. It can reduce to zero.
This matters for directors with higher income.
A director taking large dividends may lose some or all of their Personal Allowance if adjusted net income exceeds £100,000.
This can create a high effective tax rate on income in that band.
Merranti’s Corporation Tax marginal relief guide is relevant here because owner-managed company planning should consider both the company profit band and the director’s personal income band.
Pension contributions may be better than more salary or dividends
Salary and dividends are not the only options.
Company pension contributions can sometimes be more efficient, especially where the director does not need all the money personally.
An employer pension contribution may be deductible for Corporation Tax if it is wholly and exclusively for the business and meets the relevant pension rules.
It can also move money from the company into the director’s retirement planning without being treated as salary or dividends.
However, pension contributions have annual allowance rules and should be planned carefully.
Merranti’s Corporation Tax guide is useful because pension contributions can affect taxable profit, Corporation Tax and cash flow.
The best extraction plan may include salary, dividends and pension contributions rather than only comparing salary with dividends.
Director’s loans are not a clean alternative
Some directors avoid salary and dividends by taking money as loans.
That is usually not a long-term solution.
A director’s loan account records money the director owes to the company, or the company owes to the director.
If the director takes money that is not salary, dividend, expense reimbursement or repayment of a previous loan, it may become a director’s loan.
This can create Section 455 tax if the loan is not cleared on time. It can also create a benefit in kind if the loan exceeds the relevant threshold and interest is not charged properly.
Merranti’s Section 455 tax guide and director’s loan guide explain why informal withdrawals can become expensive.
A director’s loan should not be used as a substitute for proper salary and dividend planning.
When dividends may work well
Dividends may work well where:
the company has sufficient post-tax profits
the director is also a shareholder
the company wants to avoid extra National Insurance
dividends are documented properly
the director’s personal tax position has been reviewed
the company retains enough cash for tax and working capital
shareholdings are clear
there are no unlawful dividend issues
Dividends are often useful for owner-managed companies because they allow profits to be extracted after Corporation Tax without National Insurance.
However, they depend on profits.
If the company has no distributable profits, dividends should not be declared.
When salary may work well
Salary may work well where:
the director has unused Personal Allowance
the company wants a Corporation Tax deduction
the director wants to build National Insurance entitlement
the company has Employment Allowance available
regular income is useful for mortgage or finance purposes
the company wants clear payroll records
pension planning depends on employment income
Salary is especially relevant where the company has employees and can claim Employment Allowance, or where the director needs a certain level of earned income.
However, salary above key thresholds can create PAYE and National Insurance costs.
That is why the amount needs to be calculated.
Common salary and dividend mistakes
The first mistake is taking dividends without checking company profit.
A dividend needs available distributable profit. It is not just a payment from the company bank account.
The second mistake is ignoring National Insurance.
Salary can save Corporation Tax, but it can also create employee and employer National Insurance.
The third mistake is assuming dividends are tax-free.
The dividend allowance is £500 for 2026/27, so meaningful dividends are usually taxable.
The fourth mistake is not considering Employment Allowance.
A company with employees may have a different salary strategy from a one-director company.
The fifth mistake is using director’s loans casually.
If withdrawals are not salary, dividends or expenses, they may become loans.
The sixth mistake is waiting until after year end.
By then, salary planning opportunities may have been missed and dividends may already have been paid incorrectly.
Speak to Merranti before changing your salary or dividends
Salary and dividends should be planned before the company year end, not guessed after the money has already been taken.
A proper review should check company profit, Corporation Tax rate, marginal relief, director income, Personal Allowance, dividend allowance, National Insurance, Employment Allowance, pension contributions, director’s loan account and cash flow.
Merranti’s Corporation Tax guide, Corporation Tax marginal relief guide, director’s loan guide, Section 455 tax guide and guide on how directors accidentally create tax bills are useful starting points.
If you are unsure how much salary or dividend to take from your limited company, contact Merranti Accounting before your next payroll run or dividend payment so the company and personal tax position can be reviewed together.
Is salary or dividends better for a limited company director?
Usually, a mixture is best, but the right split depends on company profit, Corporation Tax rate, National Insurance, Employment Allowance, the director’s personal income and whether the company has distributable profits.
Are dividends tax-free?
Only partly. For 2026/27, the dividend allowance is £500. Dividends above that may be taxed at 10.75%, 35.75% or 39.35%, depending on the director’s tax band. GOV.UK’s dividend tax guidance explains the rates.
Do dividends reduce Corporation Tax?
No. Dividends are paid from profits after Corporation Tax. Salary may reduce Corporation Tax if it is an allowable company expense, but dividends do not.
Can I take dividends if my company made a loss?
Usually not, unless the company has enough retained distributable profits from earlier periods. A dividend should not be paid just because there is cash in the bank.
Does a director pay National Insurance on salary?
Yes, if salary is above the relevant threshold. GOV.UK’s National Insurance for company directors guidance explains that directors pay National Insurance on annual income from salary and bonuses.
Can I just take money as a director’s loan?
You can use a director’s loan in some cases, but it should not be treated as a permanent alternative to salary or dividends. Overdrawn director’s loans can create Section 455 tax, benefit in kind issues and cash-flow problems.
