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In an owner-managed business, remuneration strategy is not just about getting paid—it’s about doing so tax-efficiently. Working out whether it’s better to pay yourself a salary or dividends, or a mix of both has always been central to how owners draw funds from their companies. But with the new UK corporation tax rates introduced in April 2023, the landscape has shifted.
In this article Emma Clifton, Business Advisory Partner, breaks down current remuneration options and highlights the pros and cons of dividends vs salary.
Corporation Tax: What’s Changed?
As of April 2023, the UK now operates a tiered corporation tax system, with the following rates:
- 19% for companies with profits up to £50,000 (small profits rate).
- 25% for companies with profits over £250,000 (main rate).
- A marginal relief applies between these two thresholds, creating a gradual increase.
This tiered system directly impacts dividend strategy, because dividends are paid from post-tax profits—so higher corporation tax means less available profit to distribute.
Dividends vs Salary: Key Differences
There are some key considerations when devising a remuneration strategy, with some of the key elements detailed below.
A salary is deductible for corporation tax purposes, whereas dividends are not
As mentioned above, dividends are paid from post-tax profits, whereas you would save corporation tax by declaring a salary or bonus first, but you would then attract personal tax of PAYE and employees National Insurance.
A salary is subject to National Insurance Contributions, whereas dividends are not
This means that the Company would attract additional corporation tax relief on the employer’s national insurance contributions.
Dividends do not count towards your state benefit entitlements
So, you could have gaps in your National Insurance record, which could lead to reduced state pension amounts upon retirement.
A salary is taxed via a PAYE Scheme, which is operated and maintained by the Company
This means that you receive the net amount, after all tax has been deducted, and should not lead to additional liabilities down the line. This can give people piece of mind of regular income and knowing that tax has already been paid. Not only this but lenders tend to favour regular salaried income for the purposes of things like loan or mortgage applications.
Dividends are taxed through the Self-Assessment regime
So, you’ll need to file a Tax Return each year. But dividends are subject to lower rates of tax, so can be attractive from a personal tax perspective, though can only be paid if there are profits within the business to pay them from.
As you can see, there are several considerations to look at, so the examples below will help to visualise each of the options:
Worked Example: £100,000 Profit before remuneration
This example assumes a single-owner company with no other employees or income.
Option 1: Full Salary
Gross Salary: £100,000
Employer NIC: approx. £14,250
Total cost to company: £114,250
Corporation Tax: £0 (profit wiped out)
Employee Tax and NIC: approx. £31,439
Net to Owner: £68,561
Option 2: Small Salary + Dividends
Salary: £12,570 (tax-free personal allowance)
Employer NIC: £0 (below secondary threshold)
Taxable profit: £100,000 – £12,570 = £87,430
Corporation Tax (assume full 25% rate): £21,857
Post-tax profit for dividends: £65,573
Dividends taxed:
- First £500 at 0%
- 37,700 at 8.75% = £3,299
- £27,373 at 33.75% = £9,238
- Total dividend tax: £12,537
Net to Owner: £12,570 (salary) + £53,036 (dividends) = £65,606
Which option is better?
In this case, the salary-only route gives a higher net income (£68,561 vs £65,606). That’s because the corporation tax saving from deducting salary outweighs the NIC cost, especially under the new higher 25% corporation tax rate.
However, the trade-off is higher upfront tax (PAYE + NIC), and more admin (payroll, pension contributions, etc.). Meanwhile, the dividend route, though slightly less efficient in this example, offers more flexibility and lower tax paperwork.
Hybrid Approach: The Sweet Spot
Most owner-managed businesses will benefit from a hybrid strategy:
Paying a small salary at or near the personal allowance (£12,570) to use the tax-free band and qualify for state pension.
Then topping up with dividends from retained profits to keep NIC low and take advantage of the lower dividend tax bands.
This keeps the total tax liability efficient, spreads the tax risk and maximises allowances. It also reduces exposure to higher corporation tax rates since salary reduces profit before tax.
What works for you
With the rise in corporation tax, salary has become relatively more attractive, but dividends remain a powerful tool—especially for companies with strong retained earnings and owners in lower personal tax bands.
But every business is different. Factors like other income, pension goals, investment plans, and cash flow all matter too. So, whilst the headline rates provide useful guidance, the smartest strategy comes from tailored planning, not guesswork.
To discuss what works best for you, get in contact with Emma Clifton or one of the Business Advisory team by calling 0330 058 6559 or by emailing hello@scruttonbland.co.uk.
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