How Construction Company Directors Should Pay Themselves in 2025/26: Salary vs Dividends 

Running a construction company comes with enough challenges without worrying about the most tax-efficient way to pay yourself. Getting this decision right could save you thousands of pounds in tax each year. Recently, a construction company director in Maidstone came to see us. He’d been paying himself a salary of £50,000 through PAYE, thinking it was the simplest approach. When we showed him how much he could save by restructuring his pay to include dividends, he was genuinely shocked – we’re talking about a potential saving of over £5,000 annually.  

Understanding the Basics: Salary vs Dividends 

As a construction company director, you have two main ways to extract money from your business: through salary or dividends. Each comes with very different tax implications. Salary is the regular payment you make to yourself for services to the company. It’s processed through PAYE (Pay As You Earn), which means Income Tax and National Insurance contributions are deducted before the money reaches your bank account. The good news is that salary is a tax-deductible business expense, reducing your company’s Corporation Tax bill.  

Dividends, on the other hand, are payments made to shareholders from the company’s profits after Corporation Tax has been paid. They’re not subject to National Insurance, which makes them significantly more tax-efficient than salary – but they can only be paid if your company has made sufficient profits. 

The 2025/26 Tax Landscape 

Understanding the current tax rates helps you make informed decisions about how to pay yourself. For the 2025/26 tax year, here’s what you need to know: Personal Allowance:  

You can earn up to £12,570 without paying any Income Tax.  

 

Income Tax Rates:  

Basic rate (20%) applies to income between £12,571 and £50,270,  

Higher rate (40%) on income between £50,271 and £125,140, and  

Additional rate (45%) on income over £125,140.  

National Insurance:  

Employees pay 8% on earnings between £12,570 and £50,270, then 2% on earnings above £50,270.  

Employers pay 15% on earnings above £5,000 annually (increased from 13.8% in April 2025).  

 

Dividend Allowance:

The first £500 of dividend income is tax-free, but this is a significant reduction from previous years when it was £2,000.  

 

Dividend Tax Rates:  

Basic rate taxpayers pay 8.75%,  

Higher rate taxpayers pay 33.75%, and  

Additional rate taxpayers pay 39.35%.  

 

Corporation Tax:  

Companies with profits under £50,000 pay 19%, whilst those with profits over £250,000 pay 25%. Marginal relief applies between these thresholds. 

The Optimal Strategy: Combining Salary and Dividends 

For most construction company directors, the sweet spot is taking a modest salary combined with dividends. This approach, often called a ‘low salary, high dividend’ strategy, maximises tax efficiency while maintaining important benefits.  

A common approach is to pay yourself a salary of £12,570 – exactly matching your Personal Allowance. This means you pay no Income Tax on your salary, though your company will pay Employer’s National Insurance of 15% on earnings above £5,000 (so on £7,570 of your salary). You can then take the remainder of your income as dividends.  

For example, if you want total income of £50,000, you’d take a salary of £12,570 and dividends of £37,430. After using your £500 dividend allowance, you’d pay dividend tax at 8.75% on the remaining £36,930, which equals £3,231. Your total tax bill would be significantly lower than taking the full amount as salary. 

A Worked Example for Construction Directors 

Let’s look at two scenarios for a construction company director wanting to take £60,000 from their business:  

Option 1: All salary Taking £60,000 as pure salary means paying: –  

Income Tax: approximately £9,486  

Employee’s National Insurance: approximately £3,794  

Employer’s National Insurance: approximately £7,125  

Total tax cost: approximately £20,405  

Option 2: Optimal mix (£12,570 salary + £47,430 dividends) –  

Employer’s NI on salary: approximately £1,136 

Income Tax on dividends (£46,930 at 8.75%): approximately £4,106  

Total tax cost: approximately £5,242  

The difference is a saving of over £15,000 annually. That’s money that could be reinvested in your business, used to hire additional staff, or simply kept in your pocket. 

The Pension Contribution Advantage 

Beyond salary and dividends, there’s a third, often overlooked method for extracting profits tax-efficiently: company pension contributions. This strategy can be particularly powerful for construction company directors approaching retirement or looking to build long-term wealth.  

When your company makes pension contributions on your behalf, several tax advantages stack up. The contribution is an allowable business expense, reducing your Corporation Tax bill. Unlike salary, there’s no National Insurance to pay – neither employee’s nor employer’s contributions. The money grows tax-free within your pension fund, and you can access it from age 55 (rising to 57 from 2028).  

For the 2025/26 tax year, you can contribute up to £60,000 into your pension and receive tax relief, though this limit may be reduced for high earners. The contribution must not exceed your company’s annual profits, and it should pass HMRC’s “wholly and exclusively” test – meaning it’s reasonable given your role and what similar businesses pay.  

A construction company director with profits of £80,000 might pay themselves a salary of £12,570, take dividends of £30,000, and contribute £37,430 directly into their pension. This approach minimises immediate tax whilst building substantial retirement savings. 

Special Considerations for Construction Companies 

Construction businesses face unique challenges that affect remuneration planning. Seasonal cash flow is common. You might have excellent months followed by quieter periods. The flexibility of dividends allows you to adjust your income based on available profits, unlike fixed salary commitments.  

If you’re tendering for contracts or applying for construction finance, lenders often want to see regular PAYE income. Taking too low a salary could affect your ability to secure funding or mortgages. A balance between demonstrable income and tax efficiency is essential.  

Many construction directors employ family members or have business partners. Your remuneration strategy needs to consider multiple shareholders and ensure dividend payments are made proportionally to share ownership. Proper paperwork – board minutes and dividend vouchers – is essential for every payment.  

The CIS (Construction Industry Scheme) complicates matters further. If you’re working on-site as well as directing the business, you need to carefully structure your income to avoid CIS deductions on your director’s remuneration. 

Common Mistakes to Avoid 

One frequent error is paying irregular or poorly documented dividends. Every dividend payment must be supported by board minutes and dividend vouchers. Without proper documentation, HMRC could reclassify payments as salary, triggering backdated PAYE and National Insurance liabilities. Paying dividends when insufficient profits exist is illegal and creates serious problems.  

Your company’s accounts must show enough retained profit after Corporation Tax to cover any dividend payment. The temptation to take drawings and call them dividends later is dangerous, so always check your financial position first. Another pitfall is ignoring your state pension. Whilst minimising salary reduces National Insurance, taking too little means you won’t build qualifying years for your state pension. To maintain your state pension entitlement, you need earnings above the Lower Earnings Limit of £6,396 per year. 

Getting Help to Optimise Between Salary vs Dividends 

The construction industry’s complexity means generic advice rarely fits perfectly. At Adams Accountancy, we work with construction company directors across Kent and beyond to create tailored remuneration strategies. Our team understands the seasonal nature of construction work, the impact of CIS, and the specific challenges facing building businesses.  

The salary vs dividends decision isn’t a one-time choice. It should be reviewed annually as your business grows and tax rules change. The right strategy today might need adjustment next year, particularly with the significant changes to National Insurance and dividend allowances we’ve seen in the past few years.  

Do you need help working out the most tax-efficient way to pay yourself from your construction company? Contact us today for a free, no-obligation chat about your specific situation. Remember, as we always say to our clients – no question is too silly when it comes to understanding your finances and getting the most from your hard-earned profits. 

About the Author 

Michelle Adams is a qualified accountant and director at Adams Accountancy, specialising in helping small and medium-sized businesses navigate tax compliance and financial planning. With over 15 years of experience supporting construction companies, sole traders, and limited companies across Kent, Michelle and her all-female team make complex tax requirements simple and manageable for busy business owners. Adams Accountancy is based in Dartford and provides comprehensive accounting services with a friendly, welcoming approach where no question is considered silly.