Salary vs Dividends — How UK Limited Company Directors Should Pay Themselves
Most UK limited company directors take a small salary — just enough to earn qualifying years for the state pension — and extract remaining profit as dividends. This combination typically produces a lower overall tax bill than a higher salary alone.
Why Keep the Salary Low?
Once your salary exceeds the National Insurance Lower Earnings Limit (£6,500 in 2025–26), you begin to build qualifying years for the state pension without paying NIC. At the Primary Threshold (£12,570), employee NIC applies at 8%. Employer NIC now runs at 15% on earnings above just £5,000, which is a direct cost to your company.
Most directors set salary at exactly the Primary Threshold (£12,570) or the Lower Earnings Limit. The Primary Threshold level uses up your personal allowance and keeps you in the state pension system. If your company can claim the Employment Allowance (now worth up to £10,500 and available to more businesses since the £100,000 eligibility cap was removed), a salary at this level may be NIC-free for the company — worth checking with your accountant.
How Are Dividends Taxed?
Dividends are paid from post-corporation-tax profits. Each individual has a £500 dividend allowance (2025–26) before dividend tax applies. Above that:
| Tax band | Dividend tax rate (2025–26) |
|---|---|
| Basic rate (up to £50,270) | 8.75% |
| Higher rate (£50,271–£125,140) | 33.75% |
| Additional rate (above £125,140) | 39.35% |
Note: these rates are increasing by 2 percentage points from April 2026 (to 10.75%, 35.75% and 39.35% respectively), making tax planning for the current year especially important.
If your income (including dividends) exceeds £100,000, your personal allowance tapers — losing £1 of allowance for every £2 of income above £100,000. This creates an effective 60% marginal rate between £100,000 and £125,140.
Why Smooth Income Across Years?
Taking a very low income one year and a large dividend the next can push you into a higher tax band unnecessarily. Keeping drawings relatively consistent helps you stay in the basic rate band and avoid the £100k taper trap.
This requires up-to-date bookkeeping so you know your distributable reserves before declaring a dividend. Declaring a dividend you cannot cover with reserves creates an overdrawn director's loan — a separate risk worth avoiding.
Frequently Asked Questions
Q: Can I pay myself only dividends and no salary? A: Yes, but you would not earn qualifying years for the state pension and might lose the personal allowance if your only income is dividends. A small salary usually makes sense.
Q: When does a higher salary become worth it? A: If your company can claim the Employment Allowance (worth up to £10,500 of employer NIC in 2025–26), raising salary to the personal allowance can become more attractive. The right level depends on your specific situation.
Q: How often can I pay myself dividends? A: There is no legal minimum frequency, but each dividend payment requires a valid board minute and must be backed by sufficient distributable reserves. Monthly or quarterly payments are common.
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