The long-standing question of whether to take income as a salary, dividends, or a mix of both has become more complex with recent tax changes introduced for the 2025–26 financial year. The changes announced in the Autumn Budget has now changed the mix a bit. So, what’s the best way to pay yourself as a business owner?
With updates to National Insurance thresholds, employment allowances, and new dividend reporting requirements, it’s important as an owner-managed business that you revisit your remuneration strategies. This is not only to ensure you are operating in the most tax-efficient way but also to understand that new reporting requirements.
What’s the best way to pay yourself as a business owner now?
Key changes that have come in this year (2025/26)
Before comparing salary and dividends, it’s important to understand some of the key legislative changes that will influence how directors are paid:
National Insurance Contributions (NICs)
- Major changes have been made to employer NICs:
- The threshold for NICs has dropped from £9,100 to £5,000, which means employers pay NIC on more of the salary.
- The rate has increased to 15%, from 13.8% previously.
- The employment allowance has increased from £5,000 to £10,500. Employment Allowance allows you to reduce your Employers NIC. A reward, if you like, for employing people.
But remember you can only claim employment allowance if you have at least two directors or employees earning over £5,000. Single-director companies are excluded.
A way around this for many single-director companies has been to formally compensate their spouse or adult children who have been supporting the business. However, if they are offered a formal employment contract and earn over £10,000, you will also need to provide them with the workplace pension. This means more administrative and possibly additional expenses.
We suggest that you speak to your accountant before taking these steps. If you are working with us and would like to discuss this issue, please get in touch with your usual manager.
New Dividend Disclosure Rules
Beginning this tax year, directors who receive dividends from their own companies are required to report these dividends in the employment section of their self-assessment tax return. Additionally, you must disclose your percentage shareholding in the company.
This change in reporting increases transparency for HM Revenue & Customs (HMRC) and may lead to greater scrutiny regarding the distribution of dividends.
Obviously, it is the current tax year, so we have not yet seen how it will appear on the form itself. However, we will wait for HMRC to release the designs, which is likely to be towards the end of February or March 2026.
Self-Employment Declarations
If you are self-employed, you will now be required to declare when your self-employment began or ends, again from the current tax year. This helps HMRC determine employment status and could impact how certain individuals are classified for tax purposes.
Penalties are also mentioned. Penalties for failure to declare this information. The disclosure will be for the 2026 Tax Return.
So, coming back to what’s the best way to pay yourself as a business owner, let’s look at the two most common ways.
Salary vs Dividends
Salary
Paying yourself a salary provides a predictable income and qualifies you for state pension and other benefits. It also reduces your company’s corporation tax bill, as salaries are tax-deductible expenses.
However, salaries are subject to both income tax and NIC, which can make them more costly overall. They can also impact your business’s monthly cash flow due to regular payroll obligations. However, if cash is tight and you are unable to draw your wage in a given month, you can charge it to your directors loan account.
Dividends
Dividends are drawn from post-tax profits and are not subject to NIC, which makes them attractive from a tax-efficiency standpoint. For this tax year (2025/26), the dividend allowance remains at £500, meaning only dividends above this threshold are taxed.
Dividends are generally taxed at a lower rate than salaries and are often paid in lump sums, offering flexibility. However, they can only be paid if the business has retained profits, and they don’t reduce corporation tax.
Which Strategy Is Right for You?
Choosing between salary and dividends is not a one-size-fits-all decision. Each method has advantages and drawbacks depending on your goals:
- Go with salary if you prefer a stable monthly income, want to contribute regularly to a pension, qualify for the state pension or need predictable figures for mortgage applications.
- Choose dividends if you want to maximise take-home pay, avoid NICs, and your business consistently generates sufficient profits.
- Opt for a combination if you want to balance predictability with flexibility, reduce tax liabilities, and adapt to your cash flow needs. This is the best option for most clients.
Many directors find that a mixed approach allows for tax efficiency while still enjoying the benefits of a stable income and contributing to long-term investments such as pensions.
Before deciding however, consult an accountant because there will be other factors in the mix such as perhaps charging rent on the property the business uses or paying yourself interest on the loan you have made to the business.
At Myers Clark we have been advising clients about the most tax efficient remuneration planning for decades and we are experienced on various scenarios. If you want to work with us why not email us at enquiries@myersclark.co.uk.
What would be our recommendations?
Regardless of your chosen method, effective planning is essential. Here are our TOP 5 action points to stay on top of your remuneration strategy:
- Look at your cash flow and profits for the next 12-18 months and decide how much the company can afford to pay you and when. You can then decide the split between dividend and salary.
- For your salary, aim to stay just above the lower earnings limit for NICs, to maintain access to state benefits without incurring excessive tax.
- Plan a Dividend Strategy: Determine the timing and amount of dividends based on your personal income needs and available profits.
- Look at how else you can draw money out of the company? We mentioned rent and loan interest, but how about using your own home for the business and others?
- Regularly review your financial figures with an accountant. As profits fluctuate, reassess your pay strategy frequently to ensure tax efficiency.
Final Thoughts
Navigating the complexities of tax laws and increased scrutiny from HMRC can be daunting for directors of limited companies.
It’s completely understandable, especially when trying to find the best balance between business and personal goals. While dividends may seem like a more appealing option at first, it’s essential to carefully weigh all factors to determine the most effective strategy for your unique situation.
It’s important to remember that taking dividends without available profits can lead to compliance issues, and nobody wants to face the stress of a director’s loan that needs to be repaid or taxed.
To alleviate some of that concern, seeking the guidance of a qualified accountant who truly understands your business and its future objectives can make a significant difference. They can help ensure that your remuneration strategy aligns with your needs while keeping you compliant and confident.