The traditional approach to remuneration for many owner-managed businesses has typically involved taking a low salary, with the balance of income paid as dividends. The main reason for this has been that dividends are not subject to National Insurance Contributions, which generally results in a lower overall tax cost.
However, the increase in dividend tax rates from 6 April 2026 means that this approach may no longer be as efficient as it once was. As a result, these calculations are worth reviewing. This is something I have been discussing with a number of affected clients recently. In fact, just this morning I was able to help a company with two director-shareholders save over £10,000 per year by restructuring relatively modest remuneration packages.
In some cases, replacing dividends entirely with salary can be particularly effective, especially where the business owner can benefit from the Employment Allowance. This is explained further in my earlier blog. This approach can be especially relevant for husband-and-wife companies with no additional employees.
That said, care must be taken. If increasing salary pushes an individual’s income above £100,000, they may fall into the well-known 60% effective tax band. More detail on this can be found here. In such cases, the additional tax cost could outweigh any potential savings.
Another factor to consider is timing. Salary is subject to PAYE and National Insurance, meaning tax is paid monthly by the company. Dividends, on the other hand, are taxed through self-assessment, often at a later date. Depending on how well individuals manage their cash flow and set aside funds for tax liabilities, this difference can either be helpful or create pressure.
In summary, determining the most tax-efficient remuneration structure is not straightforward. There are several factors to consider, and the right approach will vary depending on individual circumstances. This is why working with a competent accountant is essential to ensure your remuneration strategy remains both effective and compliant.
If you would like more guidance on whether to draw salary or take dividends, please do get in touch.
