Salary vs dividends: The best way to extract profit in 2025/26
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 key to extracting profit from your company in the most tax-efficient way. Both methods have distinct implications. and the right mix will depend on your specific circumstances.
The Autumn Budget, with its changes to employers national insurance rates and the employment allowance has further complicated the picture.
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 needs to be above a minimum level for this to apply.
- Tax-deductible for the company: Salaries 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.
- 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 national insurance contributions, which can make them tax-efficient. However, dividend tax and corporation tax rates have eroded this advantage.
- 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, an over reliance on dividends could reduce your contributions towards state benefits.
The combined approach
Many business owners find that a combination of salary and dividends offers the best balance. For example, a modest salary 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 exact split will depend on your personal circumstances.
If you would like help determining what the best approach is for extracting an income from your company in 2025/26, please give us a call. Our expert tax team 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.
