Salary or Dividends: Best Option for Directors?

Choosing the Right Director Pay: Salary, Dividends, or Both?

Hey there! If you’re a company director settling into the new tax year, chances are you’re wondering, “Should I pay myself a salary, take dividends, or mix both?” The rules are always changing, so let’s break down your options for 2025-26, in plain English.

What’s New for Directors This Year?

2025-26 ushers in a few tax tweaks you can’t ignore:

• Dividend Disclosure Rules: Owner-managed business (OMB) shareholders will need to meet updated reporting requirements for dividends. Transparency and accuracy just got more important.
• General tax rates and allowances are shifting, potentially altering the overall savings from each option.

Before you decide, stay on top of HMRC’s latest guidance and consult with your accountant.

Salary: Stability and Simplicity

A regular PAYE salary comes with familiar perks:
• Steady Income: Predictable payment helps with budgeting—both for you and your business.
• Pension Contributions: Salary counts as qualifying earnings for pension plans.
• State Benefits: Only salaried payments contribute towards state pension, statutory pay (like sick or maternity), and loan/mortgage applications.
• Employment Rights: Directors on PAYE have formal access to employment protections.

But, there’s a tradeoff:

• National Insurance (NICs): Salaries are subject to both employer and employee NICs.
• Income Tax: Everything paid as salary is taxed via PAYE at source.

Dividends: Flexible, but Watch the Details

Taking dividends can be attractive:
• Tax Advantages: Dividend tax rates are lower than PAYE income rates (but keep an eye on annual allowances).
• No NICs: Dividends aren’t subject to NICs, potentially lowering your overall tax bill.
• Flexible Timing: You can declare dividends as suits your personal finances and company reserves.

On the flip side:

• Profits Only: You can only issue dividends if your company makes a profit.
• No State Benefits: Dividends don’t count towards your pension or statutory payments.
• Disclosure: Upcoming changes demand more detailed dividend reporting, especially for OMB directors.

Best of Both: Salary + Dividends

Most directors choose a blend. Why?

1. Tax-Free Allowances: You can take a salary up to the NIC threshold (£12,570 in 2025-26) to benefit from the personal allowance with minimal tax/NIC cost. 2. Dividends Above That: Top up with dividends, keeping within your basic-rate tax bracket when possible, to minimise higher-rate taxes. 3. Maximise Pension and Benefits: The salary ensures your state benefits stay healthy, while dividends give you efficiency.

Here’s a quick example:

Type	Up To Annual Threshold	Tax/NICs Impact
Salary	£12,570	No NICs/low tax if under limits
Dividends	Balance	Dividend allowance then dividend tax

Tip: Always check your company’s profits before withdrawing dividends—illegal dividends can land you in trouble.

Choosing What’s Right for You

Let’s review key considerations:
• Cash Flow: Do you need steady income or are you comfortable with flexibility?
• Long-Term Plans: Are pension contributions or statutory entitlements important for you?
• Tax Rate Sensitivity: Staying within lower tax brackets saves more, but may limit your annual take-home from the company.

Each director’s circumstances are different. An accountant or tax adviser can help tailor the right solution for you and your business.

Next Steps: Make Remuneration Work for You

• Review your company’s profitability, and check HMRC’s up-to-date tax rates for 2025-26.
• Decide how much you need to take each month, and plan accordingly.
• Balance your salary/dividend mix with future pension plans and any statutory payment needs.
• Track dividend disclosures carefully, especially with new OMB rules rolling in.

Let’s make your remuneration strategy work harder this tax year. If you’re unsure, reach out to a qualified adviser who can crunch the numbers for your situation.