Salary vs Dividends in 2026: Which Is Now More Tax Efficient?

Salary or dividends that is the question (that I asked that I get asked more than any other)

On a regular basis for one reason or another somebody is asking whether they should take their money out of their company as a salary or as a dividend.

Historically, the answer was always via dividend as the lack of national insurance meant a much lower tax charge.

However, with successive governments increasing both the corporation tax rate which dividends are subject to prior to distribution and the dividend rate, culminating in the 2% hike with effect from 6th April 2026. The tax advantages have diminished and there is actually no definitive answer as to which methodology produces less taxation.

By way of example if we talk a situation of a company with a single shareholder who takes a salary of £12,570 and he is then left with exactly £50,000 profit. If he were to take that £50,000 as a dividend, he would be £1,873 better off than if he took it as a salary. On the other hand, if we now consider a company with five equal shareholders who each take £12,570 as salary leaving the company with a profit of £250,000. If that is taken as a dividend rather than a salary, they would each be £104 worse off each. If they took a £500 dividend and the rest of salary, they would be £282 better off than just taking a dividend.

At the lower end of the scale with profits of under £50,000 and tax predominantly at the basic rate it would appear that a strategy of using dividends would generate a better outcome than salary, provided the taxpayer is subject to national insurance, whilst at the higher end with profits exceeding £250,000 and higher rate taxpayers a strategy involving salary rather than dividends would appear to give a lower tax bill.

Tax is not the only matter that should be considered, and we list some of the other matters: –

Timing of Tax payments – On a salary the tax is deducted in real time under PAYE. Under the dividend route the corporation tax element is delayed on average 15 months and the income tax element 6 months.

Flexibility – In a quasi partnership with multiple owners once a salary has been awarded it is very difficult to rescind part of that salary against the individuals wish, whereas a dividend is approved by a majority, so if the majority decide to not pay a dividend or reduce it one month the mechanism is far easier.

Arrears – Whilst from a cash flow perspective delaying payments is often seen as a good thing, sometimes delaying a payment from a time when one has cash to a later date when cash may become tight, is not always a good strategy.

Unless there is a specific reason we think that anyone making the decision from scratch, should providing the cash flow will support it, adopt a salary strategy, however for those already on a dividend strategy we would suggest sticking to it, unless the cash flow is there to switch.