I work closely with our Tax Manager, Nickie Antley-Slater when to consider tax rates before compiling accounts, and together, below we’ve set out the key points for the 2025/26 tax year (6th April 2025 to 5th April 2026), plus the pros and cons of each option.
How are salary bonuses taxed?
When you take a bonus as salary, it is treated just like your regular wages and goes through PAYE, meaning tax and National Insurance are calculated immediately at source. The key points for 2025/26 are:
- Income tax via PAYE bands (in England, Wales and Northern Ireland): personal allowance £12,570, basic rate to £50,270, higher to £125,140, then additional rate above that. Scotland has different bands.
- Employee NIC at 8% between the primary threshold and the upper earnings limit, then 2% above that.
- Employer NIC now 15% for 2025/26, with the secondary threshold reduced to £5,000 p.a. (so employer NIC kicks in earlier).
- Employment allowance can reduce the employer’s overall NIC bill by up to £10,500 if the business is eligible (note: companies where the sole employee is also the sole director generally cannot claim).
- Corporation tax (CT) deduction: salary and employer NIC are deductible for CT, so they reduce your company’s taxable profits (CT is 19%/25% depending on profit level, with marginal relief in between).
How are dividends taxed?
Dividends are treated differently to salary. They can only be paid from distributable profits after corporation tax has been accounted for, and they require the correct paperwork. For 2025/26, the main points are:
- Source of funds: dividends cannot create or increase a loss position. Paying unlawful dividends can expose directors / shareholders to personal repayment obligations.
- National Insurance: dividends are not treated as “earnings” and therefore no employee or employer NICs apply.
- Tax-free allowance: the dividend allowance remains at £500 for 2025 / 2026. Any dividend income above this is taxable.
- Tax rates: dividend income is taxed at 8.75%, 33.75%, or 39.35% depending on whether it falls within the basic, higher, or additional rate bands. These apply across the whole UK (unlike salary, which has different bands in Scotland).
- Corporation tax relief: dividends are not deductible for corporation tax purposes, as they are distributions of profit rather than an expense.
- Paperwork: dividends must be formally declared by the company, supported by minutes, and each payment should be backed by a dividend voucher.
- Pensions: dividend income does not count as “relevant UK earnings” for personal pension contributions, although employer contributions from the company may still be tax-efficient if appropriate.
- Other interactions: dividend income counts towards adjusted net income, which may affect entitlement to Child Benefit (tapered between £60,000–£80,000) and can also trigger student loan repayments.
Taking bonus as a salary vs dividend – pros and cons
To help you weigh up the options more clearly, we’ve set out the main advantages and drawbacks of taking a bonus as salary versus as a dividend in the table below:
Factor | Salary bonus | Dividend |
Tax treatment | Taxed through PAYE at income tax rates: 20% up to £50,270; 40% up to £125,140; 45% above that (different bands apply in Scotland). | Taxed at dividend rates of 8.75%, 33.75% and 39.35%, after the £500 dividend allowance. |
National Insurance | Employee NIC at 8% between thresholds, 2% above; employer NIC at 15% above £5,000. Employment Allowance of up to £10,500 may reduce the cost, but sole director/sole employee companies cannot usually claim. | No NICs for either employee or employer, making dividends more efficient on this front. |
Corporation tax impact | Salary and employer NIC are deductible for corporation tax, reducing company profits before CT (19%/25% depending on profit level). | Dividends are not deductible — they are paid out of post-tax profits only. |
Borrowing & mortgage applications | PAYE income often strengthens affordability for mortgages and other borrowing, as lenders prefer steady salary evidence. | Lenders may discount or scrutinise dividend income as it can fluctuate year to year. |
Pension planning | Salary counts as “relevant UK earnings”, allowing personal pension contributions with tax relief. Employer contributions are also possible and usually deductible. Salary also helps preserve statutory entitlements such as maternity or paternity pay. | Dividends do not count as relevant UK earnings for personal pension contributions. Employer contributions can still be made by the company but must pass the “wholly and exclusively” test. |
Allowances & reliefs | Uses the personal allowance (£12,570), though this tapers away if income exceeds £100,000. May also trigger the High Income Child Benefit Charge (£60,000–£80,000). | First £500 is tax-free under the dividend allowance; anything above is taxed at dividend rates. Dividends also count towards adjusted net income, so can trigger the Child Benefit charge and student loan repayments. |
Flexibility | Salary is fixed through payroll; little scope to adjust timing once processed. | Can be timed to fit tax planning (provided profits exist) and potentially spread across tax years. |
Paperwork & compliance | Simple – processed via payroll with PAYE reporting. | Requires board approval, minutes, and dividend vouchers. Dividends can only be declared from distributable (realised) profits under the Companies Act 2006. Unlawful dividends may need to be repaid. |
2025 / 2026 figures to take into consideration when deciding whether to take bonus as salary or dividend
- Income tax bands (England/Wales/NI): £12,570 personal allowance; 20% to £50,270; 40% to £125,140; 45% above. (Different in Scotland.)
- Employee NIC: 8% main rate; 2% above the upper earnings limit. Employer NIC: 15% with a £5,000 secondary threshold. Employment allowance: up to £10,500, subject to eligibility.
- Dividend allowance: £500; dividend tax rates 8.75% / 33.75% / 39.35%.
- Corporation tax: 19% small profits rate (<£50k), 25% main rate (>£250k), marginal relief in between.
- High Income Child Benefit Charge: starts at £60,000, fully withdrawn by £80,000.
Practical tips to take into consideration when deciding whether to take bonus as salary or dividend
1. Run the numbers with current rates
The recent rise in employer NIC to 15% and the cut in the secondary threshold can tilt the salary vs. dividend balance compared with prior years.
2. Check employment allowance eligibility
It can materially soften the employer NIC cost, but single-employee / sole-director companies usually don’t qualify. Take a look at our recent blog post about The Employment Allowance for more information.
3. Consider pensions early
If you mainly draw dividends, employer contributions can be a powerful, CT-deductible alternative to a cash bonus — provided they’re appropriate for the role and meet the “wholly and exclusively” test.
4. Bear in mind your family benefits and loans
Salary or dividends that push your adjusted net income can trigger Child Benefit clawback and student loan repayments.
5. Keep the paperwork clean
Minutes and dividend vouchers are essential; only pay dividends from realised profits supported by up-to-date accounts.
Speak to LWA for bespoke salary and dividend advice
As you can see from the information in our blog, there isn’t a one-size-fits-all answer for which is the better option for taking your bonus as a salary or dividend payment. A blend of modest salary (to protect allowances and tax benefits) plus targeted dividends (to avoid employee NIC) is often efficient — but the “best mix” hinges on your numbers, profit forecasts and personal goals. At LWA, we run tailored comparisons for clients taking into consideration profit levels, other income, benefits, pensions and timing before any advising on any payout method.
If you’re unsure which is the best approach for your you, please call us on 0161 905 1801 in our Manchester office or call 01925 830 830 for our Warrington team, or send us an email to mail@lwaltd.com with ‘Bonus as salary / dividend query’ in the subject field.