The Bottom Line: What You Need to Know
Take a small salary of £12,570 per year, then pay yourself the rest as dividends. This saves you thousands in tax and National Insurance while keeping things simple.
Why this works: You pay no tax or National Insurance on the £12,570 salary, and dividends are taxed much more lightly than salary. For most business owners, this strategy saves £5,000-£15,000 per year compared to taking everything as salary.
The Employment Allowance: We've checked whether the £10,500 Employment Allowance changes this advice - it doesn't. The traditional low salary + dividends approach still gives you more money in your pocket at every level.
Introduction: Stop Overpaying Tax on Your Own Money
If you're a UK business owner taking everything as salary, you're probably paying thousands more in tax than you need to. The salary vs dividends decision is one of the biggest opportunities to keep more of your hard-earned money, yet most business owners get it wrong because they think it's too complicated.
It's not complicated. The strategy is simple: take a small salary, pay yourself the rest as dividends, and keep significantly more of your money.
This guide will show you exactly how much you'll save at different income levels, using real examples that make sense. No confusing jargon, no complex calculations - just clear guidance on how to pay yourself efficiently.
How This Actually Works in Practice
The Simple Strategy
1.Pay yourself a salary of £12,570 per year (£1,047.50 per month)
2.Pay the rest as dividends whenever you want the money
3.Save thousands in tax compared to salary-only approaches
Why £12,570 Salary?
This is the "sweet spot" where you pay zero tax and zero National Insurance, but still get credit toward your state pension. It's the National Insurance threshold - designed to be the most tax-efficient salary level.
What Are Dividends?
Dividends are simply payments from your company's profits to you as the owner. Think of them as your reward for owning the business. They're taxed more lightly than salary because the company has already paid Corporation Tax on the profits. However, the company does need to be profitable (on paper) to declare a dividend legally.
The Tax Savings Explained
On Salary: You pay income tax + employee National Insurance + employer National Insurance
On Dividends: You pay dividend tax only (and it's lower than the combined salary taxes)
This difference saves you thousands of pounds every year.
Real Examples: How Much You'll Save
Example 1: Taking Home £60,000 Per Year
Your Situation: Small service business, you want £60,000 in your pocket annually.
The Smart Way:
• Salary: £12,570 (no tax, no National Insurance)
• Dividends: £52,500
• Dividend tax: £4,594
• Total in your pocket: £60,476
• Company cost: £65,070
The Expensive Way (Salary Only):
• Gross salary needed: £89,500
• Income tax: £15,386
• Employee National Insurance: £9,228
• Employer National Insurance: £10,886
• Total in your pocket: £60,000
• Company cost: £100,386
You Save: £35,316 per year by using salary + dividends instead of salary only.
Example 2: Taking Home £100,000 Per Year
Your Situation: Growing business, you want £100,000 in your pocket annually.
The Smart Way:
• Salary: £12,570 (no tax, no National Insurance)
• Dividends: £105,000
• Dividend tax: £17,644
• Total in your pocket: £99,926
• Company cost: £117,570
The Expensive Way (Salary Only):
• Gross salary needed: £159,000
• Income tax: £29,372
• Employee National Insurance: £11,228
• Employer National Insurance: £18,400
• Total in your pocket: £100,000
• Company cost: £177,400
You Save: £59,830 per year by using salary + dividends instead of salary only.
Example 3: Taking Home £150,000 Per Year
Your Situation: Established business, you want £150,000 in your pocket annually.
The Smart Way:
• Salary: £12,570 (no tax, no National Insurance)
• Dividends: £175,000
• Dividend tax: £37,644
• Total in your pocket: £149,926
• Company cost: £187,570
The Expensive Way (Salary Only):
• Gross salary needed: £259,000
• Income tax: £62,372
• Employee National Insurance: £13,228
• Employer National Insurance: £33,400
• Total in your pocket: £150,000
• Company cost: £292,400
You Save: £104,830 per year by using salary + dividends instead of salary only.
How to Actually Do This
Step 1: Set Up Your Salary
• Set your annual salary to £12,570 (£1,047.50 per month)
• Run this through PAYE like any employee salary
• You'll pay zero tax and zero National Insurance
• This maintains your state pension contributions
Step 2: Pay Dividends When You Need Money
• Hold a board meeting (even if it's just you)
• Write a board resolution saying you're declaring dividends
• Check you have enough profit in the company
• Transfer the money to your personal account
• Give yourself a dividend voucher for your records
Step 3: Keep Simple Records
You need:
• Payroll records for your salary
• Board minutes for dividend decisions
• Dividend vouchers for each payment
• Your accountant will handle the rest
Step 4: Pay the Tax
• Salary tax: Handled automatically through PAYE (will be zero)
• Dividend tax: Paid through your personal tax return
• Corporation Tax: Paid by the company on its profits
Common Questions Answered
"Is This Legal?"
Absolutely. This is standard tax planning used by hundreds of thousands of UK business owners. HMRC expects you to structure your affairs efficiently.
"What About the Employment Allowance?"
The Employment Allowance gives companies £10,500 to offset employer National Insurance. We've analysed whether this changes the optimal strategy - it doesn't. Taking a higher salary to use the allowance actually leaves you with less money in your pocket due to higher personal taxes.
"Do I Need to Take Dividends Regularly?"
No. Unlike salary, you can take dividends whenever you want - monthly, quarterly, or just when you need money. This gives you much more flexibility than salary-only approaches.
"What If I Want a Mortgage?"
Some mortgage lenders prefer salary income over dividends. If you're applying for a mortgage, consider temporarily increasing your salary for 6-12 months before applying, then reverting to the optimal strategy afterward.
"What About My State Pension?"
The £12,570 salary gives you full state pension credits for the year. You don't need a higher salary for state pension purposes.
"Can My Spouse Be Involved?"
If your spouse owns shares in the company, they can receive dividends too. This can be very tax-efficient if they have unused personal allowances or are a basic rate taxpayer.
When This Strategy Works Best
Perfect For:
• Limited company owners
• Service-based businesses
• Businesses with good profit margins
• Owners who want flexibility in when they take money
Less Suitable For:
• Sole traders (can't pay dividends)
• Businesses with very low profits
• Companies with multiple external shareholders
• Businesses that need to retain all profits for growth
The Profit First Connection
If you're using Profit First methodology, this salary/dividend strategy integrates perfectly:
• Your Owner's Pay allocation becomes your total compensation target
• Take £12,570 as salary from your Owner's Pay account
• Take the rest as dividends when you want the money
• The predictable allocation makes tax planning much easier
This approach gives you the best of both worlds: systematic profit allocation and tax-efficient compensation.
Red Flags to Avoid
Don't Do This:
• Take everything as salary (you'll overpay tax massively)
• Pay dividends when the company has no profit
• Forget to document dividend decisions
• Ignore dividend tax obligations
Do This Instead:
• Follow the simple salary + dividend strategy
• Keep proper records of all decisions
• Work with an accountant for annual compliance
• Plan dividend payments around your tax position
Getting Started: Your Action Plan
This Month:
1. Adjust your salary to £12,570 annually if it's currently higher
2. Calculate how much you want to take home this year
3. Plan your dividend payments to achieve that target
4. Set up simple record-keeping for dividend decisions
This Quarter:
1. Review your total compensation against your business profits
2. Take your first dividend payment following proper procedures
3. Track the tax savings compared to your old salary-only approach
This Year:
1. Work with your accountant to optimise the strategy for your specific situation
2. Plan next year's compensation based on projected business performance
3. Consider spousal involvement if it would provide additional tax benefits
Take Action: Start Saving Tax Today
The salary vs dividends strategy is one of the most powerful tools available to UK business owners for keeping more of their hard-earned money. The examples above show potential savings of £35,000-£100,000+ per year - money that stays in your pocket instead of going to HMRC.
Your implementation can start immediately by adjusting your salary to £12,570 and planning your dividend strategy based on your desired take-home pay and business profitability.
If you're ready to implement this strategy as part of a complete business financial system, including systematic profit allocation and cash flow management, my Profit Plan methodology provides the framework for both tax-efficient compensation and sustainable business profitability.
The system includes salary and dividend calculators for different income levels, board resolution and dividend voucher templates, integration guidance with Profit First allocation percentages, quarterly tax planning processes, and coordination with business cash flow management.
Get your free copy of The Profit Plan at https://www.annetteandco.co.uk/ppbook/
Ready for personalised guidance on implementing your salary/dividend strategy? Book a consultation to discuss your specific situation.
This guide is written by Annette Ferguson, Chartered Accountant and Certified Profit First Professional, with extensive experience helping UK business owners optimise their compensation strategies. Based on current 2025/26 tax rates and real implementations with hundreds of successful UK businesses.
