Now that the self‑assessment deadline has passed, many directors are taking a fresh look at how they take profits from their companies. The choice between salary and dividends isn’t just about “what saves the most tax.” It also affects pensions, state benefits, borrowing ability, and long‑term financial planning. Getting the balance wrong can be expensive. So what is the best way to pay yourself as a business owner or company director?

Alison Price, Partner at TC Group, one of our trusted affiliates looks at the options for business owners trying to decide whether a salary or dividends is best.

Salary v Dividends: A Quick Overview 

Salary 

  • Taxed under Income Tax and National Insurance 
  • Counts towards pensions and state benefits 
  • Helps build qualifying years for the state pension 
  • Provides stable income, which lenders like 

Dividends 

  • Paid from post‑tax profits 
  • Usually taxed at lower rates 
  • Do not attract National Insurance 
  • Don’t count towards pensions or benefits 

Most directors need a mix of the two, enough salary to protect long‑term entitlements, with dividends used to keep overall tax as efficient as possible. 

 

Key tax changes coming out of the 2025 Autumn Budget that may impact salary v dividends

Several changes announced in the Autumn Budget will affect how directors take income going forward: 

Dividends 

  • £500 dividend allowance remains 
  • From April 2026, dividend tax rates increase to:  
  • 10.75% basic rate 
  • 35.75% higher rate 
  • 39.35% additional rate 
  • Dividends inside ISAs, LISAs, and pensions remain tax‑free 
  • New reporting requirements for directors of close companies from 6 April 2025 

Savings interest (from April 2027) 

  • Rates increase by 2 percentage points 
  • Personal Savings Allowance remains at £1,000 (basic), £500 (higher), none (additional) 

Property income (from April 2027) 

  • Rates increase by 2 percentage points 
  • Property allowance, Rent-a-Room Scheme, and mortgage interest rules unchanged 

Frozen tax thresholds 

Thresholds remain frozen until 2031, meaning more people will be pushed into higher tax bands over time. 

These changes mean dividends are still useful, but the gap between salary and dividend tax efficiency is narrowing, especially for higher earners. 

 

When a salary can be more beneficial 

There are situations where taking more salary simply works better: 

Example: Higher-earning director 

Emma receives most of her income as dividends and earns around £120,000. Increasing her salary to £50,000 spreads her tax more evenly, supports pension contributions, and helps maintain benefit entitlements. 

Example: Mid‑earning director 

James takes £50,000 in dividends. A small salary helps him stay within lower tax bands and protects access to statutory benefits. 

Other advantages of salary include: 

  • Allows regular pension contributions 
  • Supports access to state benefits 
  • Helps with mortgage or loan applications 
  • Provides predictable cashflow 
  • Reduces reliance on fluctuating profits 

 

What should you be thinking about with salary v dividends? 

  • Tax efficiency is not just about this year—it’s about building long‑term financial security 
  • Rising dividend tax rates and frozen thresholds mean many directors should now review their salary/dividend mix 
  • Professional advice helps balance take‑home pay, pension planning, and future entitlements 

 

Thinking about selling your business? 

If you are thinking about selling your business in the coming years, don’t worry too much about the impact of salary v dividends on that process.  Work out what is best for you during the time that you own and run the business. As part of the sale preparations, a process can be conducted to normalise the profits in a way that reflects how the business will be run by the acquirer. 

For you as an individual, reviewing your strategy now, rather than during the next self-assessment rush, allows for proactive planning rather than reactive adjustments.  

A relatively small change to your approach can improve overall tax positioning, strengthen your pension outlook, and better support major life goals such as property purchases or retirement planning. 

 

Alison Price

Partner, TC Group

Alison leads the TC Letchworth, Cambridge and Huntingdon Owner Managed Business Department and her extensive career equips her with the knowledge and skills to support ambitious business owners across various industries.

 

For more information about our work with TC Group and any questions about this article contact Richard Murray.