Salary vs dividends: the best way to extract profit in 2025/26

If you trade as a limited company, then you will likely know that balancing salary and dividends is crucial when extracting profit from your company in the most tax-efficient way. Both methods have tax distinct implications and the right split of salary and dividends taken from your company will depend on your specific circumstances.

The Autumn Budget introduced changes in connection with employers national insurance rates and the employment allowance which has further complicated the picture. This may cause certain individuals to rethink their remuneration strategy.

Here we set out some of the factors you need to keep in mind.

Salary: What to consider

A salary is a straightforward way to pay yourself from your company, and it offers a few advantages. However, it also comes with specific tax and national insurance obligations.

Here are some of the advantages:

• Eligibility for state benefits: Taking a salary is a way of ensuring that you qualify for state benefits, such as the State Pension. However, the salary paid needs to be above an individual’s lower earnings limit of £6,500pa (£125pw) in order to obtain a qualifying year for state benefit purposes.
• Tax-deductible for the company: Salaries unlike dividends are treated as an allowable expense for your company and so reduce your company’s corporation tax bill.

There are disadvantages though:

• Salaries are subject to both income tax and National Insurance contributions. Depending on the salary amount, the overall tax burden can be higher than other methods.
• Your company may need to pay employers’ National Insurance Contributions on your salary. From 2025-26, an employers National Insurance Charge will arise on a salary payment made that is just above the lower earnings limit. In the Autumn budget it was announced the Secondary Threshold for National Insurance will decrease from £9,100pa to £5,000pa (the secondary Threshold determines the level of employers National Insurance paid on a salary). The increased employers National Insurance charge may be mitigated by the employers allowance available, which will increase from £5,000 pa to £10,500pa from the 2025-26 tax year.
• Salaries have to be processed through PAYE (Pay As You Earn), which means your company will have some additional compliance and reporting responsibilities.

Dividends: What to consider

Dividends are another popular way for small business owners to withdraw profits from their company.

Here are some of the advantages:

• Dividends are not subject to employers or employees national insurance contributions, which can make them tax-efficient. However, the increases in dividend tax and corporation tax rates have eroded this advantage.
• Dividends are taxed at a lower rate of income tax compared to salaries across all the tax bands.
• Unlike salaries, dividends don’t require PAYE processing. They must still be properly documented, but generally this is much simpler to do than operating PAYE.

Dividends are paid from post-tax profits, meaning the company must have sufficient retained earnings to be able to distribute dividends. Also, if an individual does not receive a salary payment which matches or exceeds the lower earnings limit, they will not obtain a qualifying year for National Insurance purposes. This could therefore have an impact on whether they later receive the full state pension.

The combined approach

Many business owners find that a combination of salary and dividends offers the best balance. For example, a salary that matches the lower earnings limit can ensure your eligibility for state benefits while minimising the national insurance you pay. Dividends can then be used to supplement that income in a tax-efficient manner.

The optimum split will depend on your personal circumstances. For example, you may be in receipt of other sources of income, or you may only wish to extract a certain level of income form your company in a given tax year. Factors such as these can impact your remuneration planning.

If you would like help determining what the best approach is for extracting an income from your company in 2025/26 based on your situation and plans, please give us a call. Our expert tax accountants have tools to assess the optimal balance and will be happy to help you minimise your tax liabilities and support your long-term financial wellbeing.

If you would like any more information on the above, please contact Joe Wilson in the tax department on 023 8046 1237 or email Joe Wilson.