If you are a director of a UK limited company, you have two main ways to extract profit: salary (or bonus) and dividends. The standard advice has long been to take a small salary up to the National Insurance threshold and take the rest as dividends. But dividend tax rates have risen significantly. The dividend allowance dropped to £500 from April 2024, and the tax rates themselves are now 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate).
That has more directors asking whether a bonus might actually be cheaper. The question is not straightforward. You need to compare the total tax cost on both sides of the transaction: the company's corporation tax deduction versus the personal tax and National Insurance on the bonus, and the corporation tax paid on retained profits versus the dividend tax on the distribution.
This article compares the bonus vs dividend director tax position for the 2025/26 tax year. We will work through real numbers so you can see which route leaves more money in your pocket.
How a Bonus Works for a Director
A bonus is simply a salary payment that is not part of your regular monthly payroll. It is treated exactly the same as salary for tax purposes. The company gets a corporation tax deduction for the full amount. You pay income tax and employee National Insurance on the bonus. The company pays employer National Insurance at 13.8% on the amount above the secondary threshold (£9,100 for 2025/26).
Here is the key difference from a regular salary. If your regular salary is already above the secondary threshold, every pound of bonus triggers employer NI. If your regular salary is below that threshold, you have some headroom before employer NI kicks in. Most directors who follow the standard salary approach take a salary of £12,570 (the personal allowance amount), which is above the secondary threshold, so employer NI applies to the full bonus.
The company can claim Employment Allowance of up to £10,500 to offset employer NI, but only if you are eligible. Companies with a single director and no other employees often cannot claim it. Check your eligibility carefully.
How a Dividend Works for a Director
A dividend is a distribution of post-tax profits. The company must have sufficient retained profits (distributable reserves) to declare a dividend legally. The company does not get a corporation tax deduction for dividends paid. But the company also does not pay National Insurance on dividends.
You pay dividend tax on any dividends you receive above the £500 annual dividend allowance. The rates for 2025/26 are 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate). These rates are lower than the equivalent income tax rates on salary (20%, 40%, 45%), but you also lose the corporation tax deduction on the profit that funds the dividend.
The Real Numbers: Bonus vs Dividend in 2025/26
Let us work through a concrete example. Assume you are a director with no other income. Your company has £100,000 of pre-tax profit available to distribute. You are a higher rate taxpayer once you take the money out. We will compare taking the full £100,000 as a bonus versus taking it as a dividend.
Scenario 1: Take the Full £100,000 as a Bonus
The company pays you a bonus of £100,000. The company must also pay employer NI at 13.8% on the bonus. That adds £13,800 in employer NI. The total cost to the company is £113,800. But the company gets a corporation tax deduction for both the bonus and the employer NI. At 25% corporation tax (assuming profits above £250,000 or marginal relief), the tax saving is £28,450 (25% of £113,800). The net cost to the company after corporation tax relief is £85,350.
On the personal side, you receive £100,000. You pay income tax at 40% on the amount above £50,270 (the higher rate threshold). You also pay employee NI at 2% on earnings above £50,270. Your total personal tax and NI is roughly £33,000. You take home approximately £67,000.
Total tax paid: £13,800 (employer NI) plus £33,000 (personal tax and NI) minus £28,450 (corporation tax saving) equals £18,350 net tax cost. Your take-home pay is £67,000.
Scenario 2: Take the Full £100,000 as a Dividend
The company retains the £100,000 profit and pays corporation tax on it at 25%, which is £25,000. That leaves £75,000 available to distribute as a dividend. You receive £75,000. After the £500 dividend allowance, you pay dividend tax at 33.75% on £74,500. That is £25,143.75. You take home £49,856.25.
Total tax paid: £25,000 (corporation tax) plus £25,143.75 (dividend tax) equals £50,143.75. Your take-home pay is £49,856.25.
Which Is Better?
In this example, the bonus route leaves you with £67,000 take-home pay versus £49,856.25 for the dividend route. That is a difference of £17,143.75 in your favour by taking a bonus. The bonus route also results in less total tax paid (£18,350 vs £50,143.75).
This is a significant difference. But it only applies if your company pays corporation tax at 25%. If your company pays at the small profits rate of 19% (profits up to £50,000), the numbers shift. Let us check that scenario.
When the Small Profits Rate Changes the Calculation
Assume your company has £50,000 of pre-tax profit. You are a basic rate taxpayer. Company pays 19% corporation tax.
Bonus Route
Company pays you £50,000 bonus. Employer NI at 13.8% is £6,900. Total cost £56,900. Corporation tax saving at 19% is £10,811. Net cost to company £46,089. You pay 20% income tax and 8% employee NI on the bonus. Personal tax and NI is approximately £12,500. You take home £37,500.
Dividend Route
Company retains £50,000 profit, pays 19% corporation tax (£9,500), leaving £40,500 available. You receive £40,500. After £500 dividend allowance, you pay 8.75% dividend tax on £40,000, which is £3,500. You take home £37,000.
Here the bonus route still wins, but the margin is much narrower: £37,500 vs £37,000. That is only £500 better off with the bonus. The difference is small enough that other factors (cash flow, administrative ease, pension contributions) might tip the balance.
Why the Bonus Often Wins for Higher Rate Taxpayers
The bonus route benefits from the corporation tax deduction. When the company pays 25% corporation tax, that deduction is worth 25p for every £1 of bonus. The dividend route loses that deduction entirely. The dividend tax rates, while lower than income tax rates, are applied to a smaller pool of money (after corporation tax). The net effect is that for higher rate and additional rate taxpayers, the bonus route typically leaves more cash in your pocket.
For basic rate taxpayers, the dividend tax rate of 8.75% is much lower than the combined income tax and NI on a bonus (roughly 28% for a basic rate earner). But the corporation tax deduction on the bonus narrows the gap. As we saw above, the difference is small enough that it may not be worth the administrative hassle of processing a bonus through payroll.
When a Dividend Still Makes Sense
Dividends are not always the wrong choice. Here are situations where dividends remain the better option:
- You are a basic rate taxpayer. The margin is small, and dividends are simpler to process. No payroll entries, no RTI submissions, no employer NI calculations.
- Your company cannot claim Employment Allowance. If you are a single-director company with no other employees, you cannot claim the Employment Allowance. The employer NI on a bonus is a real cost. In the basic rate example above, the employer NI of £6,900 nearly wipes out the benefit of the corporation tax deduction.
- You want to preserve cash in the company. A bonus is an immediate cash cost. A dividend only goes out after corporation tax is paid, which gives you more time to manage cash flow.
- You are close to the higher rate threshold. Taking a large bonus could push you into the higher rate bracket for the year, triggering 40% tax and 2% employee NI on the excess. A dividend taxed at 33.75% might be cheaper at the margin, depending on the corporation tax rate.
- You have other income that already uses your personal allowance. If you have a separate salary or rental income, the bonus is taxed at your marginal rate from pound one. The dividend is taxed at the dividend rate from pound one (above the £500 allowance).
What About Pension Contributions?
If you are considering a bonus, you could instead ask your company to make a direct pension contribution on your behalf. Company pension contributions are corporation tax deductible, free of employer NI, and free of personal tax and NI. They are subject to the annual allowance (£60,000 for 2025/26, tapered for high earners).
For a higher rate taxpayer, a £100,000 company pension contribution costs the company £100,000 (no NI) and saves 25% corporation tax (£25,000). The net cost to the company is £75,000. You get £100,000 into your pension with no personal tax to pay. Compare that to taking £100,000 as a bonus, paying £33,000 in tax and NI, and investing the remaining £67,000. The pension route is dramatically more tax efficient.
Pension contributions are not a direct alternative to dividends for cash flow needs. But if you can afford to lock the money away until retirement, it is the most tax-efficient extraction method available.
How to Structure a Bonus Payment
If you decide to take a bonus, process it through your regular payroll software. Xero, FreeAgent, QuickBooks, and Sage 50 all handle bonus payments. You need to run an RTI submission to HMRC on or before the payment date. The bonus counts as earnings for the month in which it is paid.
You can also accrue a bonus in the company accounts before the year-end but pay it after. The corporation tax deduction is available in the year the bonus is accrued, provided you pay it within 9 months of the year-end. This is a common planning technique to reduce the company's corporation tax liability for the year.
Be careful with the timing. If you accrue a bonus in year 1 but do not pay it within 9 months of the year-end, the deduction is deferred to the year of payment. That can create a corporation tax underpayment if you filed based on the accrual.
What About IR35?
If you are a contractor working through your own limited company and caught by IR35 (off-payroll working rules), the bonus vs dividend comparison changes completely. Under IR35, your company is treated as an employer for tax purposes. The deemed employment payment rules mean that any dividends you pay are not subject to IR35. But the company's deemed employment payment (the amount treated as salary) is calculated before dividends.
If you are outside IR35, the standard comparison above applies. If you are inside IR35, dividends remain the primary extraction method because the deemed salary calculation already accounts for the tax that would have been paid if you were an employee. Taking additional bonuses inside IR35 can create double taxation.
Check your IR35 status carefully. If your client is a medium or large company, they should have issued a Status Determination Statement (SDS). If they have not, request one in writing. Small clients (fewer than 50 employees, turnover under £10.2M, or balance sheet under £5.1M) leave the determination with you.
Practical Steps for Deciding
Here is a straightforward process to decide your remuneration strategy:
- Calculate your company's effective corporation tax rate. If profits are under £50,000, the rate is 19%. Between £50,000 and £250,000, marginal relief applies. Above £250,000, the rate is 25%.
- Determine your personal tax band. Include all other income (salary, rental income, savings interest) to find your marginal rate.
- Run the numbers for both routes. Use the worked examples above as templates. Adjust for your specific figures.
- Consider cash flow. A bonus costs the company cash immediately. A dividend can be deferred until after the corporation tax return is filed.
- Check Employment Allowance eligibility. If you can claim it, the employer NI cost on a bonus is effectively zero up to £10,500 of employer NI.
- Factor in pension contributions. If you do not need the cash now, a company pension contribution is almost certainly the best option.
As ICAEW qualified accountants, we run these comparisons for clients regularly. The right answer depends on your specific numbers, your company's profit level, and your personal tax position. There is no one-size-fits-all answer.
If your company's profits are above £50,000 and you are a higher rate taxpayer, the bonus route is worth serious consideration. The tax saving can be substantial. If you are a basic rate taxpayer with profits under £50,000, the dividend route may still be simpler and marginally better.
Speak to a qualified accountant before making a significant change to your remuneration structure. The wrong choice can cost you thousands. The right choice depends on your specific circumstances, not general rules.
For a full breakdown of how your specific numbers compare, our team at Holloway Davies can run the remuneration planning for you. We also have a director remuneration calculator on our site that lets you compare the two routes side by side.