Limited Company Tax for Directors / Lesson 3 of 9
Salary versus dividends
Most directors take a small salary and the rest as dividends. Here is exactly why.
The short answer
- ✓ Salary is deductible for the company; dividends are not
- ✓ Dividend rates are lower and carry no National Insurance
- ✓ Only salary builds your State Pension record
- ✓ A sole director company generally cannot claim the employment allowance
The trade-off
| Salary | Dividend | |
|---|---|---|
| Reduces company profit | Yes | No |
| Employee National Insurance | Yes | No |
| Employer National Insurance | Yes, at 15% | No |
| Personal tax rate | Income tax rates | Dividend rates, lower |
| Builds State Pension record | Yes | No |
| Needs company profit | No | Yes, distributable |
Dividend rates are lower
Salary Dividend
Basic rate 20% 10.75%
Higher rate 40% 35.75%
Additional rate 45% 39.35%
Plus National Insurance on salary, none on dividends.
Dividend rates are lower because the company has
already paid corporation tax on the profit.Why not take everything as dividends?
Because dividends are not deductible. A pound paid as salary reduces company profit and therefore corporation tax. A pound paid as dividend does not, so corporation tax has already been charged on it.
The usual answer is a small salary plus dividends, which captures the corporation tax deduction on the salary while avoiding significant National Insurance.
Why take any salary at all?
Three reasons that have nothing to do with the arithmetic being marginal:
- Salary is deductible, dividends are not
- Salary above the lower earnings limit builds your State Pension record; dividends never do
- A company with no profit cannot legally pay a dividend, but can still pay salary
The second is the one people undervalue. A director paying themselves entirely in dividends for a decade has ten years missing from their National Insurance record, and discovers it much later.
The employment allowance
Many employers can reduce their employer NI bill through the employment allowance, but a company whose only employee is a single director is generally not eligible. That is precisely the common one-person-company setup, so it usually does not help.
The bit nobody explains
The optimal salary is not a fixed number and it changes every April as thresholds move. Setting a level once and leaving it for five years is how directors end up paying employer NI unnecessarily or missing a qualifying year by a small margin.
Review it each April against the current thresholds. The calculator below does the arithmetic for the current year.
Common mistakes
- All dividends, no salary. Loses the deduction and the pension record.
- Assuming the employment allowance applies. Sole director companies generally cannot claim it.
- Never revisiting the salary level. Thresholds move every April.
- Paying dividends without profit. Covered in the next lesson, and it is serious.
Try it on your own numbers
This is the same calculator as the full tool page, using 2026/27 rates.
Your company
Single-director company taking a salary plus the rest as dividends. Updates as you type.
Quick salary presets
Most single-director companies with no other employees can't claim this. Leave off if unsure - it only affects employer NI on salary.
Estimate for 2026/27. Excludes pension contributions, expenses and other income. Not advice.
Total take-home
from profit · effective tax
- Salary drawn
- Employer NI on salary
- −
- Corporation Tax
- −
- Dividends available
- Income Tax + NI + Dividend tax
- −
- Total tax (company + personal)
Most tax-efficient salary
A salary of gives the highest take-home () at this profit level. That's more than your current choice.
Estimate only. Your circumstances and allowances may differ.
Take-home across salary choices
How your salary/dividend split changes take-home and total tax, at profit.
Company side
- Profit before salary
- Less salary
- −
- Less employer NI
- −
- Taxable profit
- Corporation Tax
- −
- Dividends available
Personal side
- Income Tax on salary
- −
- Employee NI on salary
- −
- Dividend tax
- −
- Dividend allowance used
- Personal tax total
- Net take-home
Dividends are taxed as the top slice of income, after salary. The first of dividends is tax-free. Corporation Tax uses small-profits and marginal-relief rules. Employer NI is only deducted when Employment Allowance does not cover it.
Compare saved scenarios
| Scenario | Salary | Take-home | Total tax | Eff. rate | |
|---|---|---|---|---|---|
Key takeaways
- ✓ Salary is deductible for the company; dividends are not
- ✓ Dividend rates are lower and carry no National Insurance
- ✓ Only salary builds your State Pension record
- ✓ A sole director company generally cannot claim the employment allowance
Check you have got it
3 quick questions. No score is kept, and you can change your mind.
1. Why do most directors take some salary rather than only dividends?
2. Do dividends attract National Insurance?
3. Can a company whose only employee is its sole director claim the employment allowance?
Sources
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