Key points
- Rising dividend tax rates and frozen income tax thresholds mean relying primarily on dividends is not always the most tax-efficient option.
- The balance between salary and dividends influences more than tax – including pensions, borrowing capacity, benefits eligibility and cashflow stability.
- Many directors may benefit from increasing their salary to support long-term financial planning and entitlement building.
With the self-assessment deadline now behind us, many company directors are taking the opportunity to review how they draw income from their businesses.
A common question we are often asked: what is the most tax-efficient way for a director to pay themselves?
Traditionally, the answer has often leaned heavily towards dividends. Directors have typically taken a modest salary and supplemented it with dividends to minimise tax. However, recent tax changes mean the answer is no longer quite so clear cut.
Dividend tax rates have increased, income tax thresholds are frozen, and further reporting requirements are expected in the future. Together, these developments are narrowing the historic tax advantage dividends once held.
Why the decision matters beyond tax
Although tax efficiency is important, the way directors pay themselves affects several other areas of their financial life.
Your choice between salary and dividends can influence:
- Long-term pension provision
- Eligibility for state benefits
- Mortgage and borrowing capacity
- Cashflow consistency
- Exposure to future tax policy changes
Because of this, the decision should be approached as part of a broader financial strategy rather than simply a short-term tax calculation.
The changing tax landscape
Recent policy developments are reshaping the way remuneration strategies work for company directors.
Dividend tax rates have risen, and income tax thresholds are frozen until 2031. Over time, this means more people will drift into higher tax bands as their income grows – a phenomenon often referred to as fiscal drag.
Further changes are also scheduled. From April 2027, tax rates on savings and property income will increase by two percentage points, with rates rising to:
- 22% for basic-rate taxpayers
- 42% for higher-rate taxpayers
- 47% for additional-rate taxpayers
Importantly, dividends held within ISAs, LISAs and pensions remain tax-free, but outside these wrappers the overall tax burden is gradually increasing.
Taken together, these developments reduce the gap between salary and dividend taxation, particularly for higher earners.
When a higher salary can make sense
In some situations, increasing a director’s salary may now offer strategic advantages.
For instance, a higher-earning director taking most income as dividends at around £120,000 may find that increasing their salary to approximately £50,000 spreads income more efficiently across the tax bands. This can also strengthen their ability to contribute to pensions and maintain eligibility for certain benefits.
Similarly, a director earning around £50,000 in dividends may benefit from introducing or increasing a salary element. Doing so could help maintain access to statutory benefits while remaining within favourable tax thresholds.
Salary can also bring several practical benefits:
- It supports regular pension contributions
- It can strengthen mortgage applications
- It provides predictable monthly cashflow
- It reduces reliance on the company generating sufficient distributable profits for dividends
Reviewing your remuneration strategy
Because of the evolving tax environment, many directors may find it worthwhile to reassess the balance between salary and dividends rather than simply continuing with historic patterns.
Even a relatively small adjustment to the way income is taken from a business could:
- Improve overall tax efficiency
- Strengthen pension planning
- Support borrowing or property purchases
- Align income more effectively with long-term financial goals
Reviewing your strategy earlier in the year – rather than during the next self-assessment rush – allows time for proactive planning instead of reactive adjustments.
If you plan to sell your business
Directors who are considering selling their business in the coming years should not be overly concerned about how their salary and dividend choices might affect the eventual transaction.
During the sale process, advisers typically carry out profit normalisation to reflect how the business would operate under new ownership. This means remuneration decisions made during the period of ownership rarely have a lasting impact on the sale outcome.
The priority should instead be ensuring your personal income strategy works effectively for you while you continue to run the business.
Planning ahead
The balance between salary and dividends has become more nuanced as tax rules evolve. What once seemed like a straightforward approach may no longer provide the same advantages.
Taking the time to review your remuneration strategy today could improve your long-term tax position, support retirement planning and help you move closer to major life goals.
If you would like guidance on structuring your income in a way that aligns with your wider financial plan, get in touch to see how we can help.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
Please note that LISAs are not available through St. James’s Pace.
The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.
SJP Approved 02/04/2026