Think a Salary’s Best? Dividends Might Save You More, Here’s How!

Apr 25

2 min read

Let’s face it, when you’re running your own business, how you pay yourself matters just as much as how much you pay yourself. And while most people default to a salary (because hey, it feels familiar), that may not be the most tax-savvy move.

If you’re a shareholder in your own limited company, there’s a better way to get paid: dividends.

And no, this isn’t some overly complex accountant-speak, this is a great strategy that could leave you with more money in your pocket each year.

So, What Are Dividends Anyway?

Dividends are payments made to shareholders from a company’s profits .After your business covers its costs, pays its taxes, and has profit left over, that’s where dividends come in.

You can pay yourself from those profits in the form of dividends, which often come with a much smaller tax bill than a standard salary.

Why Take Dividends Instead of Salary?

Let’s break it down. Here’s why thousands of business owners choose dividends:

✅ No National Insurance Contributions: Salaries come with NICs (National Insurance Contributions). Dividends don’t.

✅ Lower Tax Rates: Dividends are taxed more gently than salary income. It’s that simple. More cash stays with you.

✅ More Flexibility: W Dividends give you more control over when and how

much you pay yourself.

Dividend Tax Rates for 2025/2026

Here’s what you’ll owe above the £500 dividend allowance:

Basic Rate (Income up to £50,270): 8.75%
Higher Rate (£50,271 to £125,140): 33.75%
Additional Rate (£125,140+): 39.35%

Even at the higher brackets, that’s still better than income tax + NI on a salary.

Real Example: John vs. Paul

Let’s look at two fictional business owners: John and Paul.They both own limited companies.

They both draw £30,000 in income. But how they do it?

Paul takes the full £30,000 as a salary.
John works with a savvy accountant and takes a mix of salary and dividends.

Here’s what happens:

	Paul (Salary)	John (Salary + Dividends)
Take-home Pay	£25,120	£28,519
Tax Paid	£2,217	£13

Over £3,000 more in John’s pocket, just by planning smart.

That’s not loopholes or dodgy tactics. That’s just making the tax system work the way it was designed to.

Important Things to Know About Dividends

Before you start handing yourself dividend cheques left and right, there are a few rules to follow:

❌ Dividends can only be paid from profits: If your business isn’t profitable, you can’t declare a dividend. No profit = no party.

❌ They must be properly documented: You’ll need board meeting minutes and a paper trail. It’s not optional, it’s compliance.

❌ You must declare dividends on your personal tax return: Even though they’re taxed differently, HMRC still wants to know. Declare it, always.