Salary vs Dividends
Salary vs Dividends
As you’ve probably seen in the recent Budget, changes to dividend tax rates have once again altered the tax landscape for company-owners who receive income through dividends. With the new tax year approaching fast, we are carefully reviewing our internal guidance on what may now represent the most efficient balance between salary and dividends.
At this stage, even the experts from whom we undertake our Continuing Professional Development (CPD) have not reached definitive conclusions. However, early indications suggest that the balance may have finally tipped toward salary being the more tax-efficient route overall, particularly at higher levels of profit extraction.
We don’t yet have all the precise answers — and the detail will likely evolve over the coming months — but please be assured that we will not be advising you to do anything we wouldn’t do ourselves.
Other selected changes of note
- The thresholds for income tax and National Insurance — including personal allowance and higher-rate thresholds — have been frozen until 2031. This “freeze” will likely result in more people being pulled into higher tax bands over time as incomes rise.
- From 2029, the rules around salary-sacrifice pension contributions have been tightened: this reduces the attractiveness of pension salary-sacrifice for NIC savings in many cases.
- Income from savings, rental property and other non-salary income will also face higher tax pressure under the new measures the government is introducing.
Comment
From a practical standpoint, it’s a relief that National Insurance, Corporation Tax and VAT remain untouched — meaning businesses haven’t been hit as directly or as sharply as in the previous round of changes. However, there has been no clear justification offered for why the highest rate of dividend tax hasn’t risen in line with the others. The measures appear to focus more on modest and mid-level dividend income rather than the very top end of the income spectrum, which means the burden will fall most heavily on owner-managed businesses while investors with more complex structures remain largely unaffected. It feels at odds with the ambition for SMEs and entrepreneurs to drive future growth — particularly when this group is already navigating rising costs and regulatory demands.
