TL;DR
Minimum salary and the rest in dividends is the default myth, a way to preserve your state pension while keeping taxes low. But focusing on tax savings shows only part of the picture.
Dividend-heavy structures can impact how much you can borrow, create illegal dividend risk at year-end, interact poorly with corporation tax, complicate your exit and quietly erode as allowances shrink and rates rise. The optimal answer to salary vs dividends may be costing you money – and calculators only give answers, not consequences.
The comfortable myth around salary vs dividends is choosing a minimum salary to preserve your state pension, with the rest taken in dividends. It’s tidy and familiar, and for many directors has become the default, unchallenged year after year.
But “what is the minimum tax?” is too narrow a question. It assumes that tax is the only variable worth optimising, and that the structure that minimises your liability this year will continue to serve you well as your business grows, your borrowing needs change, and your exit approaches.
Calculators give you the answer. What they don’t show you is the consequences. Here’s what they miss:
Borrowing
Lenders often view dividends as variable and discretionary, while salary is seen as stable and contractual.
When profits fluctuate, lenders may average or adjust dividend income. A dividend-heavy structure won’t prevent borrowing, but it can reduce flexibility, limit lender choice, and the amount you can borrow when you need it.
Illegal dividends
Without sophisticated accounting procedures, it’s easy to assume there is profit available for distribution.
The year-end process tells a different story. Accruals and adjustments, debt written off, depreciation, corporation tax for the current year and so on reduce distributable profits, and can leave you with an overdrawn directors’ loan account.
The consequences are real. Additional tax charges, potential personal liability, and HMRC scrutiny.
Corporation tax interaction
Salary is a cost; dividends are not.
With a marginal corporation tax rate of 26.5%, the distinction matters. In a business you own, the combined personal and corporate tax savings must be considered, and many calculators ignore this.
Exit planning
What worked when you were 45 may work against you at 55.
In some cases, leaving profits in the business or deploying them strategically within it, not only appeals to buyers but it can also enhance exit value and allow extraction under more favourable tax treatment.
Stealth tax
Dividend allowances have reduced, dividend rates have increased, and corporation tax has risen.
A calculation that looked optimal a few years ago may no longer be. Doing the same thing is often the most expensive option.
So what should you do?
Dividends will often remain the most tax-efficient route, but only when the wider consequences are understood and factored in. A calculator is a starting point, not a strategy.
Speak to your accountant about your specific position, not just tax, but the borrowing implications, your year-end process, your corporation tax rate, and where you want to be in five to ten years.
We offer a free Tax Minimisation Review, a structured conversation with a Chartered Tax Adviser, focused entirely on your position. No obligation, just clarity.