Why UK Business Owners May Want to Rethink the “Minimum Salary + Dividends” Strategy
For decades, accountants across the UK have repeated the same golden rule to owner-managed businesses (OMBs): pay yourself a low salary, then take the rest as dividends.
And for years, it worked beautifully — especially when Corporation Tax was a flat 19%.
But since April 2023, the landscape has changed. Companies with profits above £50,000 now face a higher main rate of 25%, with a sliding “marginal relief” rate between £50,000 and £250,000.
This shift means the old minimum-salary approach is no longer always the smartest move. In fact, in many cases, taking a higher salary can leave you better off — not just in your own pocket, but for the company as well.
Why the change matters
The logic boils down to how salaries and dividends are taxed at the company level:
Salary is an allowable business expense, reducing the company’s taxable profits. With Corporation Tax now as high as 25%, every £1 in salary can save the company 25p in tax.
Dividends, on the other hand, come from post-tax profits — meaning the company has already paid Corporation Tax before you even receive them.
When Corporation Tax was lower, the difference in tax savings wasn’t that significant. But at 25%, the numbers start to shift — especially if your profits are comfortably above £50,000.
Looking beyond personal tax
Many directors only look at their personal Income Tax and NIC bill when deciding on remuneration. But this misses half the picture.
When Corporation Tax is high, you need to weigh up both:
The personal tax you pay on salary or dividends
The tax the company saves by paying you that salary
And don’t forget pensions — employer contributions can be deducted from company profits, reduce your Corporation Tax bill, and avoid NIC entirely, all while building long-term wealth.
Let’s run the numbers
Example 1 — Basic Rate Taxpayer
Scenario A — Minimum Salary + Dividends
Profit before tax: £70,000
Salary: £12,570
Taxable profit: £57,430
Corporation Tax @ 25%: £14,357.50
Dividends after CT: £43,072.50
Personal tax on dividends: £2,740.88
Total after-tax income: £52,901.62
Scenario B — Higher Salary (£20,000) + Dividends
Profit before tax: £70,000
Salary: £20,000
Taxable profit: £50,000
Corporation Tax @ 25%: £12,500
Dividends after CT: £37,500
Personal tax (salary + dividends): £3,336.88
Total after-tax income: £54,163.12
💡 Result: The higher-salary approach puts £1,261 more in the director’s pocket, thanks to the Corporation Tax savings.
Example 2 — Using Pension Contributions
Same £70,000 profit, but instead of extra salary, the company makes a £10,000 employer pension contribution:
Salary: £12,570
Pension contribution: £10,000 (tax-deductible)
Taxable profit: £47,430
Corporation Tax @ 25%: £11,857.50
Dividends after CT: £35,572.50
Personal tax on dividends: £1,982.50
Total income (cash + pension): £57,160
💡 Result: Similar immediate take-home to Scenario A, but with an extra £10,000 invested in the pension — without extra personal tax.
The takeaway for business owners
The once-universal “minimum salary + dividends” approach no longer fits all situations. If your company profits are above £50k, the 25% Corporation Tax rate changes the game.
By considering the combined effect of company and personal taxes — rather than just your personal take-home — you may be able to:
Keep more money overall
Reduce your Corporation Tax bill
Boost your pension without increasing personal tax
If your profits are over £50k, now is the time to revisit your pay strategy. The old rule of thumb could be quietly costing you money.