Dividends v. Bonus – what’s best?

What’s Best for You as a Limited Company Director?

If you’re running a limited company, you’re probably familiar with taking a small salary and topping up your income with dividends. It’s a common approach, and in many cases, it’s tax-efficient. But as your business grows – especially if profits are heading above £50,000 – that standard split might not be the best choice anymore.

Let’s explore the differences between dividends and bonuses (or increased salary), and when one might be more beneficial than the other.

What’s the difference?

• Salary/Bonus: This is paid through the payroll. It’s an allowable business expense, so it reduces your company’s corporation tax bill.
• Dividends: These are paid from after-tax profits. They don’t reduce corporation tax but are taxed at a lower rate personally.

When dividends are more tax-efficient

Dividends usually work out better when your total personal income is below £50,000. Here’s why:

• You get a £500 tax-free dividend allowance (2025/26).
• The dividend tax rate is lower than income tax at the same level:
  • 8.75% for basic rate
  • 33.75% for higher rate
  • 39.35% for additional rate
• You don’t pay National Insurance on dividends.

So if your company is making modest profits and you don’t need all of that income personally, dividends can save tax.

When bonuses or higher salary make more sense

As your company’s profits grow, particularly above £50,000, dividends can start to cost more in overall tax – especially once you move into higher income tax brackets.

Paying a bonus or increasing your salary can be a better option because:

• It reduces your company’s profit, bringing you back below the £50,000 threshold for corporation tax (which rises from 19% to 26.5% on profits between £50k and £250k).
• Although you pay income tax and National Insurance on salary or bonus, the corporation tax saving often makes up for it.
• It helps towards your state pension and other entitlements (salary counts, dividends don’t).
• If you plan to get a mortgage or loan, lenders often favour salary and bonuses over dividends.

We regularly run the numbers with our clients to check the best mix – sometimes paying a higher bonus in one tax year can save thousands in corporation tax.

Other considerations

Every situation is different. Here are a few other things we take into account:

• Have you used your full personal allowance (£12,570)?
• Will dividends push you over into higher rate income tax?
• Do you want to make pension contributions or claim childcare benefits?
• Are there multiple shareholders involved?
• Is your company eligible for R&D tax relief, which could affect the corporation tax bill?

A tailored approach is key

There’s no one-size-fits-all answer. The right mix of salary, bonus and dividends depends on your income needs, company profits, and your long-term plans.

At Seed Accounting Solutions, we work closely with our limited company clients to plan ahead. We don’t just look at what’s best today – we help you make informed decisions that support your bigger goals.

Need help deciding what to take — salary, bonus or dividends?

If you’re already a client of ours, make sure you look out for your invitation to your Annual Business Review Meeting – this will be sent out 3 months before the end of your financial year. If you’re not yet a client, book in a Discovery Call here and we can get you on the right remuneration package.