Quick answer
Dividends are often tax-efficient, but they are not always the cheapest way to take profits from a limited company.
Where a company has unused Employment Allowance, an additional bonus may produce a better overall result by reducing employer National Insurance and creating Corporation Tax relief. The most efficient option depends on the company’s position and the director’s wider income.
Why dividends are not always the best option
Dividends are often treated as the default way for limited company directors to take profits from their business.
That is understandable. Dividends do not attract employee or employer National Insurance, and dividend tax rates are usually lower than the equivalent Income Tax rates applied to salary or bonuses.
But dividends are not always the most tax-efficient option.
Depending on the company’s circumstances, an additional bonus may produce a better overall result. In a recent client calculation, unused Employment Allowance meant that a bonus was potentially more efficient than the dividend the client had initially expected to take.
This does not mean bonuses are always better. It shows why directors should compare the total company and personal tax cost before making a withdrawal.
In this guide, we explain why dividends are so commonly used, how bonuses are taxed and when Employment Allowance could change the calculation.
Start with the director’s regular salary
As explained in our guide to the most tax-efficient director’s salary, many directors combine salary and dividends, typically opting for an annual salary of £12,570. The most suitable salary, however, depends on the company’s structure and National Insurance position.
Once the normal salary has been established, the next question is whether extra profits should be taken as a dividend, bonus or another form of payment.
Why are dividends so common?
Dividends are distributions of company profits to shareholders.
They are commonly used because they do not attract National Insurance contributions and are taxed at separate dividend rates.
For the 2026/27 tax year, salary is generally subject to National Insurance where applicable, along with Income Tax at 20%, 40% or 45% in England, Wales and Northern Ireland. On the other hand, dividend income above the £500 dividend allowance is taxed at lower rates of 10.75%, 35.75% or 39.35% and does not attract National Insurance.
Despite not attracting National Insurance, it’s important to note that dividends are paid from profits that have already been subject to Corporation Tax. A director may therefore pay dividend tax personally after the company has already paid Corporation Tax on the profit being distributed.
Dividends can also be paid only when the company has sufficient distributable profits. Having enough money in the company bank account does not necessarily mean a dividend can be declared.
This means dividends may still be efficient, but the personal tax rate alone does not tell the whole story.
How is a director’s bonus taxed?
A bonus paid to a director is employment income. It will normally be processed through payroll and may be subject to:
- Income Tax
- Employee National Insurance
- Employer National Insurance
This can make bonuses appear more expensive than dividends.
The important difference is that a qualifying bonus will usually be deductible when calculating the company’s taxable profits. This may reduce the amount of Corporation Tax the company has to pay.
A proper comparison should therefore include the Corporation Tax saving, employer and employee National Insurance, any Employment Allowance available, the director’s Income Tax and the final amount received personally.
How Employment Allowance can change the result
Employment Allowance allows eligible employers to offset up to £10,500 of their employer secondary Class 1 National Insurance liabilities for the 2026/27 tax year.
Where a company has not used its full allowance against existing payroll costs, some or all of the employer’s National Insurance arising from an additional bonus may be covered.
That was the case for a client we recently advised.
The client wanted to extract additional profits and initially expected to use a dividend. After reviewing the company’s payroll, Corporation Tax position and remaining Employment Allowance, we found that an additional bonus produced a better overall result.
The saving arose because the client’s circumstances reduced the employer National Insurance cost, while the bonus also created Corporation Tax relief.
Not every company can claim Employment Allowance
Directors should not assume Employment Allowance is available.
A limited company cannot generally claim it where it has only one director, and that director is the only employee liable for employer Class 1 National Insurance.
A company with additional employees may qualify, provided the relevant conditions are met.
Eligibility should therefore be checked before any tax saving is assumed.
So is a bonus or a dividend more tax-efficient?
The most suitable option depends on both the company’s tax position and the director’s personal circumstances. The main factors to compare are:
Will the company receive Corporation Tax relief?
A director’s bonus and the related employer National Insurance cost will usually be deductible when calculating the company’s taxable profits. This can reduce the company’s Corporation Tax bill.
Dividends are paid from profits after Corporation Tax and do not normally create an additional deduction.
Is Employment Allowance available?
Where the company is eligible and has unused Employment Allowance, some or all of the employer National Insurance arising from a bonus may be covered.
This can significantly reduce the overall cost of paying a bonus and may make it more efficient than a dividend in some circumstances.
How will the director be taxed?
A bonus is treated as employment income and may be subject to Income Tax and employee National Insurance.
Dividends are taxed at separate dividend tax rates and do not attract National Insurance. However, the director’s existing income must still be considered, as an additional payment could push some of their income into a higher tax band.
Does the company have sufficient distributable profits?
A dividend can be paid only when the company has sufficient distributable profits. Having enough cash in the bank does not necessarily mean that a dividend can legally be declared.
A bonus is not subject to the same distributable profit requirement, although the company must still be able to afford the payment and process it correctly through payroll.
When will the payment be made?
Timing can affect the tax year in which the director is taxed, the accounting period in which the company receives Corporation Tax relief and the amount of Employment Allowance still available.
The timing of a bonus can also affect when the company receives tax relief, so this should be considered before the payment is authorised.
Where a bonus is accrued in the company’s accounts, it will generally need to be paid within nine months of the end of the accounting period for the Corporation Tax deduction to be obtained in that period. If it is paid later, the deduction will normally be deferred until the period in which payment is made.
When might a dividend still be better?
A dividend may still be the more efficient option where:
- the company cannot claim Employment Allowance
- the director would pay substantial Income Tax and National Insurance on a bonus
- sufficient distributable profits are available
- the director has unused dividend allowance or basic-rate band
- the company has already used its Employment Allowance
- several shareholders need to receive a distribution
The point is not that directors should avoid dividends. It is that they should not choose them automatically without comparing the alternatives.
Other ways to take money from a company
Depending on the circumstances, a director may also consider employer pension contributions, repayment of money owed through a director’s loan account, reimbursement of genuine business expenses or retaining profits for a future tax year.
These options serve different purposes. A pension contribution, for example, may be tax-efficient but does not provide immediate personal cash.
How CRM can help
Before taking an additional dividend or paying a director’s bonus, it is worth comparing the available routes.
At CRM, we can review your existing salary and dividend structure, the company’s available profits, its Corporation Tax position, Employment Allowance eligibility and your wider personal income.
We can then compare the total company cost, personal tax and net amount received under each option.
If you are looking to take additional profits from your limited company, contact our team to discuss the options available and identify the most suitable approach for your circumstances.
Frequently asked questions
Are dividends more tax-efficient than salary?
Often, but not always. Dividends do not attract National Insurance, but they are paid from profits after Corporation Tax and do not reduce the company’s taxable profit.
Can a company director receive a bonus?
Yes. A director’s bonus should be properly authorised, processed through payroll and reported to HMRC. Income Tax and National Insurance may apply.
Can Employment Allowance cover National Insurance on a director’s bonus?
Potentially. Where the company is eligible and has unused allowance, it may offset employer National Insurance arising from the bonus.
Should I take a bonus or dividend?
The answer depends on your income, the company’s tax position, Employment Allowance eligibility, available profits and the amount you want to withdraw. A tailored comparison is usually the safest approach.
