How salary and dividends are taxed
A bonus is salary paid through Pay As You Earn (PAYE). It normally reduces company taxable profit along with the associated employer National Insurance. A dividend uses distributable profits after Corporation Tax and gives the company no deduction. Compare both routes using the same pre-tax company budget. Comparing a £1,000 bonus with a £1,000 dividend without accounting for their different company costs gives the wrong answer.
In 2026/27 the standard employer National Insurance rate is 15% above the £5,000 annual secondary threshold for a full-year director. Employee contributions are 8% between £12,570 and £50,270 and 2% above £50,270. Employment Allowance can change the employer cost where the company qualifies and has allowance left. Dividend rates are 10.75%, 35.75% and 39.35%, with a £500 dividend allowance.
What a bonus costs
Assume the director already has salary above £50,270, the whole extra bonus is taxed at 40%, the Personal Allowance is unaffected and no Employment Allowance remains. This uses England, Wales and Northern Ireland salary rates. A £1,000 gross bonus creates £150 employer National Insurance, using £1,150 of company profit before tax. The director pays £400 Income Tax and £20 employee National Insurance and receives £580.
If all the deductible company cost falls within the 26.5% Marginal Relief band, the deduction reduces Corporation Tax by £304.75. The after-tax reduction in company funds is £845.25. That is a different measure from the £1,150 pre-tax profit needed to fund the bonus; do not mix the two when comparing it with a dividend.
What a dividend costs
Assume the dividend allowance is already used and all of the extra dividend falls at 35.75%. A £1,000 dividend leaves £642.50 after dividend tax. If the company profit producing it is wholly subject to a 26.5% marginal Corporation Tax rate, it takes about £1,360.54 of pre-tax profit to provide that £1,000 dividend. This is a marginal illustration: a larger withdrawal can cross several bands.
Compare the same £1,000 company budget
For the same director and a £1,000 increment of company profit, the bonus route leaves more immediate cash under these assumptions. Neither route changes the Personal Allowance, student-loan payments, Child Benefit charge or pension allowance in this example.
| From £1,000 before company tax | Bonus | Dividend |
|---|---|---|
| Employer National Insurance | £130.43 | £0.00 |
| Corporation Tax on this amount | £0.00 | £265.00 |
| Gross payment to director | £869.57 | £735.00 |
| Personal Income Tax | £347.83 | £262.76 |
| Employee National Insurance | £17.39 | £0.00 |
| Personal cash after tax | £504.35 | £472.24 |
The bonus leaves about £32.11 more from this £1,000 budget. Calculations use unrounded amounts before displaying pennies. The combined tax cost is about 49.57% for the bonus and 52.78% for the dividend. These are not universal director tax rates; they apply only while the stated marginal rates and allowances remain unchanged.
What can change the result
A lower existing salary may leave employee National Insurance at 8% rather than 2%. Unused employer allowance may remove the extra employer contribution. Unused personal or dividend allowances can favour a different mix, while the Personal Allowance taper can increase tax between £100,000 and £125,140 adjusted net income. Scottish salary tax rates need a separate calculation.
The company rate matters too. At a 19% Corporation Tax rate and 35.75% dividend tax, a £1,000 pre-tax dividend budget leaves £520.43. That exceeds the £504.35 bonus result under the same salary-tax and National Insurance assumptions. At 25% company tax it leaves £481.88. Check which part of the company profit the proposed payment changes, including associated companies and shorter accounting periods.
An employer pension contribution can add more to retirement savings than either cash route, subject to the annual allowance and business deduction rules. It does not provide the same immediate cash. Employer contributions are not limited by the director salary; relevant earnings limit relief on personal contributions. See our pension timing guide.
Put the chosen payment through correctly
Record the bonus obligation and apply the director payroll rules. Remuneration accrued in company accounts but unpaid more than nine months after the period end is generally deducted in the period it is paid instead. The company deduction and the director tax point are separate questions: directors have specific rules about when remuneration counts as received.
For dividends, check distributable reserves using the relevant accounts, follow the company articles and record the approval and voucher. An interim dividend is generally taxable when paid or unreservedly available; a final dividend can become due when declared unless a later payment date is specified. The declaration date is therefore not a universal tax-year rule.
A marginal bonus comparison also differs from choosing the best total annual salary. Our salary and dividends guide explains the annual comparison, and the Owner-Manager Tax Index shows how the result changes with profit under stated assumptions.
Official sources
Checked 6 September 2026: payroll rates, dividend rates, Corporation Tax Marginal Relief and dividend timing and company law.