Dividends vs Salary What’s the Most Tax-Efficient Mix in 2025?

If you’re a director of a limited company, you’ve likely heard the classic advice: “Pay yourself a small salary and top up the rest with dividends.” But how does that actually work in 2025 and is it still the most tax-efficient way to take money out of your business?

The short answer: yes, for most SME owners, it’s still one of the most efficient strategies, but only if done correctly. Let’s break it down in plain English, with numbers, risks, and planning tips to help you get it right.

What’s the Difference?

Salary is a fixed, regular payment you receive through your company’s payroll system. It’s taxed as employment income and subject to both Income Tax and

National Insurance (NI). Your company also pays Employer’s NI on top of your gross salary, making it more expensive overall.

Dividends, on the other hand, are distributions of profit made to shareholders. They are not a business expense, meaning they come from post-corporation tax profits. But they are taxed at lower personal tax rates than salary and are not subject to NI.

Here’s the key thing: you can’t pay dividends unless your company is making a profit and has enough retained earnings to cover the payment. They must be declared formally in board minutes and recorded accurately.

2025 Tax Bands (For Directors in the UK)

Understanding how each payment is taxed helps you plan your mix:

• Personal Allowance: £12,570 — the amount you can earn tax-free

• Basic Rate Salary Tax: 20% on income from £12,571 to £50,270

• National Insurance Threshold: Primary threshold ~£12,570; above this, NI kicks in

  
  

Dividend Tax Rates (2025):

• First £500: 0% (Dividend Allowance, reduced from previous years)

• Basic rate: 8.75%

• Higher rate: 33.75%

• Additional rate: 39.35%

Note: Corporation tax on profits must be paid before dividends are issued, typically at 19%–25% depending on your company's profit level.

The Most Common Setup (And Why It Works)

In most cases, directors adopt this model:

• Take a salary of £12,570, which falls within the personal allowance, keeping it free of Income Tax and NI.

  
  

• Take the remainder as dividends, keeping your overall tax liability as low as possible.

  
  

This setup allows:

• Access to state pension and benefits (you’re still counted as an employee)

  
  

• Lower NI costs — since dividends don’t attract NI

  
  

• Corporation tax relief — on the salary portion (as it’s a business expense)

Example: Taking Out £50,000 in 2025

Let’s say your company is profitable and you want to take £50,000 out as personal income. Here’s how two options compare:

Option A – All Salary

• £50,000 salary taxed under PAYE

• Approx. £11,978 paid in Income Tax and Employee NI

• Employer NI: ~£5,644 (extra cost to the business)

• Net pay: ~£38,002

Option B – Salary + Dividends

• £12,570 salary (no tax or NI)

• £37,430 paid as dividends

• Corporation tax already paid on profit

• Dividend tax due: ~£3,231 (depending on other income)

• Net pay: ~£46,769

Conclusion: This strategy saves the company money on Employer NI and increases your personal net income by nearly £9,000.

Risks and Things to Watch

While this strategy works well, there are a few important risks to manage:

• Profit Requirement: Dividends must come from post-tax profits. Paying them without available profit can lead to legal and tax consequences.

  
  

• Incorrect Use of Director’s Loan Account: If you draw funds before declaring dividends and don't repay them within 9 months, you could face a 33.75% tax charge.

  
  

• Changing Tax Legislation: The Dividend Allowance was £2,000 a few years ago. Now it’s £500. These allowances can change with little warning.

  
  

• Overlooking Timing: Dividends are taxed based on when they’re declared, so timing around tax year end matters. Strategic timing can shift your tax bill significantly.

  
  

• Misclassification: Paying dividends instead of salary for someone who should be treated as an employee could lead to an HMRC challenge.

How Jfa Helps You

At Jfa, we offer smart financial strategies tailored to how you work.

Our services include:

• Calculating your ideal salary-dividend mix based on company performance and personal goals

  
  

• Forecasting your dividend capacity to avoid cash flow or tax surprises

  
  

• Preparing board resolutions and dividend vouchers for full HMRC compliance

  
  

• Reviewing your director's loan account to prevent hidden liabilities

  
  

We also offer a free 1-hour finance health check where we review your current structure, cash flow, and profit to identify opportunities for tax efficiency.

Final Thought

Tax planning isn’t just for the wealthy. If you own a limited company, the way you pay yourself could mean a difference of thousands per year. The right mix of salary and dividends helps you save money, stay compliant, and plan with confidence.

There’s no one-size-fits-all, but there is a smart solution for your business.

Wrapping up today’s insights, tomorrow we simplify another accounting challenge