Choosing the right balance between salary and dividends can make a big difference to your tax efficiency and take-home income as a company director or small business owner. At Perrigo Consultants, we help you make informed decisions based on your financial goals, company structure, and current UK tax legislation.

What’s the Difference Between Salary and Dividends?

Salary is paid as employment income and subject to PAYE (Pay As You Earn) income tax and National Insurance Contributions (NICs).
Dividends, on the other hand, are distributions of profit to shareholders after Corporation Tax has been paid and attract a separate dividend tax.

Summary:

• Salary is a business expense; lowers Corporation Tax liability
  
• Dividends are paid from retained profits; no NICs but taxed at dividend rates
  
• You can combine both for maximum tax efficiency
  

Why It Matters: Tax Implications in 2025

Choosing the wrong mix can lead to unnecessary tax liabilities. Here’s what you need to consider:

1. Income Tax Bands (2025/26):

• Personal Allowance: £12,570 (tax-free)
  
• Basic rate (Salary): 20%
  
• Dividend tax rates:
  
  • Basic: 8.75%
    
  • Higher: 33.75%
    
  • Additional: 39.35%
    

2. National Insurance:

• Salaries above the primary threshold attract NICs (both employee and employer).
  
• Dividends are exempt from NICs.
  

How to Calculate the Optimum Split

There’s no one-size-fits-all answer, but here’s a common structure many owner-directors use:

Step-by-Step Example:

1. Take a salary up to the NIC threshold (£12,570 for 2025/26)
   
2. Extract the remaining income as dividends up to the higher rate threshold
   
3. Factor in your personal tax liabilities and company cash flow
   

Always consider other income sources, pension contributions, and long-term planning when making decisions.

Tools You Can Use

We help our clients use software such as Xero, FreeAgent, and QuickBooks to model different salary/dividend scenarios. This helps optimise director remuneration and meet HMRC reporting requirements.

How Perrigo Consultants Can Help

As Chartered Certified Accountants and Chartered Tax Advisers, we’ll assess your full financial situation and help you:

• Calculate the most tax-efficient salary/dividend combination
  
• Stay compliant with HMRC and Companies House
  
• Plan ahead for tax liabilities and changes in legislation
  
• Keep proper records and reporting using cloud software
  

Speak to a Specialist

Understanding how to calculate salary versus dividends isn’t just about saving tax—it’s about building a sustainable income strategy. Contact Perrigo Consultants today for tailored advice in Bromsgrove, Worcester, Kidderminster, and beyond.