The main options are:
- salary
- dividends
- pension contributions.
What is better, pay or dividends?
Dividends are often combined with a salary to get the most tax-effective extraction of profits when a business is carried on through a company. For many years it's been attractive to pay a small salary to use the tax-free personal allowance and secure a Corporation Tax deduction, while minimising National Insurance contributions (NICs) and protecting a qualifying year for the state pension. For 2026/27, a salary at the £12,570 Primary Threshold typically achieves this most efficiently — see our dedicated page on director's salary and dividends for the current mechanics in more detail.
The Dividend Allowance, now £500 (reduced significantly from the £5,000 it stood at when the allowance was first introduced, via steps down to £2,000 then £1,000 then £500), charges the first £500 of dividend income at 0% tax. Beyond the allowance, dividends are taxed at 10.75% (basic rate) or 35.75% (higher rate) for 2026/27, following rate increases that took effect this April.
Even with dividend tax rates now considerably higher than in 2017/18, a low salary with the balance of income taken as dividends generally remains tax efficient for director-shareholders, because the NIC saving on dividends still outweighs the extra dividend tax cost, though the margin between the two approaches has narrowed considerably as dividend rates have risen.
Example
Bonus vs. dividend, for a higher rate taxpayer wanting £1,000 in their pocket
Route 1 — Salary/bonus
The employee pays 40% income tax and 2% employee NI on the bonus — a combined 42% — so the company needs to pay a gross bonus of £1,724 for the employee to keep £1,000 net.
The company also pays 15% employer NI on top of the bonus: £1,724 × 15% = £259.
Total cost to the company before tax relief: £1,724 + £259 = £1,983.
This whole amount is tax-deductible, so at the 25% main rate of Corporation Tax, the company saves £1,983 × 25% = £496 in tax.
Net cost to the company: £1,983 − £496 = £1,487.
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01332 202660
61 Friar Gate Derby DE1 1DJ
Route 2 — Dividend
Dividends are taxed at 35.75% for a higher rate taxpayer, so the company needs to pay a gross dividend of £1,557 for the shareholder to keep £1,000 net.
Unlike a bonus, a dividend isn't tax-deductible — it can only be paid out of profit that's already had Corporation Tax deducted. So the company needs enough pre-tax profit to leave £1,557 after 25% Corporation Tax: £1,557 ÷ (1 − 25%) = £2,076 of pre-tax profit.
The comparison
Pre-tax cost to the company
Salary/bonus route £1,983
Dividend route £2,076
The bonus route costs the company about £93 less (roughly 4.5% cheaper) to deliver the same £1,000 net to a higher rate taxpayer — at the 25% main rate of Corporation Tax.
Worth noting: this comparison flips for smaller companies. At the 19% small profits rate (companies with profits under £50,000), the dividend route actually becomes slightly cheaper than the bonus route, because dividends benefit more from the lower tax rate on the underlying profit than the bonus route's smaller Corporation Tax saving. This is exactly why the answer depends on your specific numbers rather than a fixed rule — we can run the calculation for your company's actual profit level and your personal tax position.
Paying interest to the director-shareholder
Interest receipts are the main category of savings income, and two tax breaks can apply. The Personal Savings Allowance charges interest up to £1,000 (basic rate taxpayers) or £500 (higher rate taxpayers) at 0% — additional rate taxpayers receive no allowance.
The 0% starting rate for savings can also apply to up to £5,000 of savings income, though this isn't available if your other taxable non-savings income (broadly earnings, pensions, trading profits and property income) exceeds the starting rate limit. Dividends are taxed after savings income, so they don't count towards this test.
It remains reasonable for a company to pay interest to a director on any credit balance in their director's loan account, provided the rate reflects a genuine commercial market rate rather than an artificially high one.
Paying family members
Companies often seek to minimise the tax position of director-shareholders by involving family members and using each person's personal reliefs and lower rate tax bands. However, anti-avoidance rules need to be considered, particularly for married couples — where arrangements contain a gift element, the "settlements" rules may tax the person who made the gift rather than the recipient. Genuine outright gifts of "normal" share capital, from which income wholly belongs to the receiving spouse, remain exempt from these rules.
Family company share structures can still be challenged by HMRC — for example, issuing a restricted class of shares to a spouse while the other retains voting ordinary shares, or recurrent dividend waivers where profits are insufficient to pay both spouses without one waiving their dividend.
Pensions
Individual Contributions - An individual can contribute and receive tax relief on the higher of £3,600 or 100% of earnings per tax year.
Company contributions - A company will normally obtain a tax deduction against its profits for pension contributions, provided they're paid before the end of the accounting period. Employer contributions are tax and NIC-free to the director-shareholder as long as the Annual Allowance isn't exceeded.
The standard Annual Allowance is now £60,000 per tax year (increased from £40,000 in April 2023), with unused allowance from the three previous tax years potentially available to carry forward. For high earners, a tapered Annual Allowance can apply: if your threshold income exceeds £200,000 and your adjusted income exceeds £260,000, your Annual Allowance reduces by £1 for every £2 of adjusted income above £260,000, down to a minimum of £10,000. Both the threshold income and adjusted income limits must be exceeded for tapering to apply — detailed advice should be taken before undertaking significant pension planning if you're near these limits.
Conclusion – the tax system allows savings but planning is required.
Company Pages ► Limited Companies ■ Tax Saving for Limited Company Owners ■ Tax Rates ■
Registered office: 61 Friar Gate, Derby, Derbyshire, DE1 1DJ T: 01332 202660
Adrian Mooy & Co is the trading name of Adrian Mooy & Co Ltd. Registered in England No. 05770414
