Short answer (then nuance)
In 2025/26, a bonus is earnings: it goes through payroll with Income Tax, employee NI and employer NI (15%). A dividend avoids NI but is paid from post-Corporation Tax profits and is taxed at the dividend rates after the £500 dividend allowance. Your company’s Corporation Tax band (19%–25% with marginal relief) and your personal band decide the winner. GOV.UK
What changed for 2025/26 (need-to-know)
- Employer NI = 15% from 6 Apr 2025; Secondary Threshold = £5,000/yr; employee NI = 8% main rate to UEL, then 2%. GOV.UK
- Dividend allowance stays at £500; dividend tax rates remain 8.75% / 33.75% / 39.35% for 2025/26. GOV.UK
- Corporation Tax bands unchanged: 19% small profits, 25% main, marginal relief between £50k–£250k (adjust for associated companies). GOV.UK
- Directors use the annual earnings period for NI (this affects how a one-off bonus interacts with thresholds). GOV.UK
Planning note: Employment Allowance can offset employer NI, but single-director companies with no other employees are not eligible. Check eligibility before relying on it. GOV.UK
How we compare “bonus vs dividend” (apples to apples)
We’ll model the same company cash spend in two ways:
- Scenario A – Bonus: Spend the budget on a gross bonus and employer NI. Bonus + employer NI are Corporation-Tax deductible; the director pays Income Tax + employee NI through payroll. GOV.UK
- Scenario B – Dividend: First pay Corporation Tax on profits, then distribute the post-CT amount as a dividend. The director pays dividend tax after the £500 allowance. GOV.UK
Assumptions for the worked figures below:
- England/Wales/NI bands (Scotland has different income tax bands—re-run if you’re Scotland-taxed). GOV.UK
- Director already on an optimal salary.
- For the “basic-rate” comparisons we assume the marginal bonus slice sits below the UEL (so 8% employee NI); for “higher/additional” we assume it sits above the UEL (so 2% employee NI). (Directors use an annual earnings method always sanity check in your own payroll.) GOV.UK
Worked example: company wants to put £10,000 into the director’s hands
Case 1: Company at 25% CT (main rate)
A) Pay a bonus
- Let gross bonus = B. Employer NI = 15% of B. Company cash cap: B + 15% B = £10,000 ⇒ B = £8,695.65. GOV.UK
- Employee NI (assumed) and Income Tax on B:
| Personal band | Income Tax on B | Employee NI on B | Director takes home |
|---|---|---|---|
| Basic rate (20% IT, 8% NI) | £1,739.13 | £695.65 | £6,260.87 |
| Higher rate (40% IT, 2% NI) | £3,478.26 | £173.91 | £5,043.48 |
| Additional rate (45% IT, 2% NI) | £3,913.04 | £173.91 | £4,608.70 |
(Bonus and employer NI are CT-deductible; PAYE/NI processed via payroll.) GOV.UK
B) Pay a dividend
- First pay CT at 25%: post-CT available = £10,000 × (1 − 0.25) = £7,500. GOV.UK
- Dividend tax after £500 allowance:
| Personal band | Taxed amount | Dividend tax rate | Dividend tax | Director takes home |
|---|---|---|---|---|
| Basic rate | £7,000 | 8.75% | £612.50 | £6,887.50 |
| Higher rate | £7,000 | 33.75% | £2,362.50 | £5,137.50 |
| Additional rate | £7,000 | 39.35% | £2,754.50 | £4,745.50 |
(Rates and allowance confirmed for 2025/26.) GOV.UK
Result at 25% CT: In these simplified slices, dividends beat bonuses on take-home in all three bands for this £10k budget.
Case 2: Company at 19% CT (small profits rate)
- Post-CT dividend pot = £10,000 × (1 − 0.19) = £8,100. GOV.UK
- After the £500 allowance, tax on £7,600:
| Personal band | Dividend tax | Director takes home |
|---|---|---|
| Basic rate (8.75%) | £665.00 | £7,435.00 |
| Higher rate (33.75%) | £2,565.00 | £5,535.00 |
| Additional rate (39.35%) | £2,990.60 | £5,109.40 |
Result at 19% CT: Dividend wins by a wider margin versus the bonus figures above.
Case 3: Marginal relief band (effective CT between 19% and 25%)
Marginal relief gradually reduces the CT rate between £50k–£250k of profits (adjust for associated companies). The higher your effective CT rate, the smaller your post-CT dividend pot, so the dividend advantage narrows as you approach 25%. Always run the numbers with your actual effective CT. GOV.UK
Rules of thumb (use, then verify with your figures)
- High CT (near 25%) + no Employment Allowance + higher/additional personal band → Dividend usually wins. GOV.UK
- Employment Allowance available and you want pensionable pay or mortgage/underwriting evidence → Bonus can be competitive (or consider employer pension instead of cash bonus). GOV.UK
- Near the UEL on an annual director basis, the employee NI on the marginal slice may be 2%, making a bonus less painful at the margin—run a live payroll calc. GOV.UK
- Cashflow matters: PAYE/NI is due soon after a bonus; dividends need proper minutes and vouchers and must be from distributable profits. (See: Dividend Paperwork: Minutes & Vouchers (UK).)
Practical steps before you choose
- Confirm your CT band (19%, marginal, or 25%) and any associated companies. GOV.UK
- Check NI thresholds and rates for 2025/26 (employer 15%; employee 8%/2%; director annual earnings). GOV.UK
- Map your personal band and apply the £500 dividend allowance + dividend rates. GOV.UK
- If going dividend, do the paperwork correctly (board approval for interim/final per Articles; dividend vouchers given and kept). GOV.UK
- If cash is tight or reserves are thin, read Illegal Dividends: How to Avoid/Fix before paying anything.
FAQs (They Ask, You Answer)
Is a bonus always worse because of employer NI?
Not always. CT relief on both the bonus and employer NI plus your personal band and thresholds can narrow the gap—especially if Employment Allowance still applies. GOV.UK
Do dividends still “win” at higher rates?
Often yes, even in higher/additional bands—because they avoid NI. But near 25% CT and with no dividend allowance left, the advantage can shrink. Always model with your actual mix. GOV.UK
What about Scotland?
Scotland has different income tax bands (dividend rates are UK-wide). If you’re Scotland-taxed, rerun the bonus side with Scottish bands. GOV.UK
Can I just pay one big dividend to avoid NI?
Only if you have distributable profits on the declaration date and you do the paperwork properly. Otherwise it risks being an unlawful dividend (and could turn into a director’s loan with other tax charges).
(See: Illegal Dividends: How to Avoid/Fix; Dividend Paperwork: Minutes & Vouchers (UK).)
Related guides
- Dividend Paperwork: Minutes & Vouchers (UK) — simple templates you can copy
- Illegal Dividends: How to Avoid/Fix — if reserves are tight
- How to Pay Yourself as a Limited Company Director (UK 2025/26) — salary/dividend mix and worked examples
- NIC, PAYE & Pension Costs (UK 2025/26) — full employer cost picture
- Payroll Services UK and Cashflow Forecasting Services — for done-for-you modelling and a 52-week view
CTA (value-led)
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