Introduction: Salary or Dividends When the Owner Is American
Choosing between salary or dividends is the first pay decision every owner of a UK limited company makes, and for an American owner-director it is the one most often made on the wrong assumptions. A British accountant will usually recommend a small salary topped up with large dividends. That pattern works for a purely British shareholder. However, a US citizen or green card holder files a second return on the same income, and the American rules treat each form of payment in a completely different way.
The result is that the answer to salary or dividends can flip once the US return is added. Since the UK dividend rates rose on 6 April 2026, a higher-rate or additional-rate owner on the 25 per cent corporation tax rate already pays slightly less overall UK tax on salary than on dividends. Moreover, once the American 3.8 per cent net investment income tax is added, the gap widens further. This guide explains why, with current 2026/27 figures and a worked case study.
Why the Usual Salary or Dividends Advice Breaks for US Citizens
Most guidance on salary or dividends is written for the UK system alone. It compares corporation tax, National Insurance and dividend tax, and then stops. In contrast, an American owner must also ask how the IRS taxes the salary, whether the dividend is a qualified dividend, which foreign tax credit basket each payment falls into, and what happens to profits left inside the company under the controlled foreign corporation rules.
None of the leading UK pages we reviewed for this guide mention the IRS at all. Meanwhile, the American pages that do cover UK companies treat the subject in a paragraph, and at least one still quotes the old 8.75 and 33.75 per cent dividend rates. Consequently, the joint US and UK picture of salary or dividends is missing almost everywhere.
Who This Guide Is For
This guide is written for American and dual national US UK founders, consultants, investment professionals and business owners who control a UK trading company and live in Britain. It assumes profits large enough for the salary or dividends decision to matter, typically £150,000 or more a year. If you are an accidental American who has only recently learned of your US filing duty, the final sections on missed reporting are especially relevant.
The UK Side of Salary or Dividends in 2026/27
The UK half of the salary or dividends calculation turns on three taxes: corporation tax, National Insurance and income tax. Each changed materially between 2025 and 2026, so older comparisons are now unreliable.
Corporation Tax and the Deduction for Salary
A salary is a deductible expense for the company, provided it is paid for genuine work. Dividends, by contrast, come out of profits that have already borne corporation tax. According to HMRC's corporation tax rates, the small profits rate is 19 per cent on profits up to £50,000 and the main rate is 25 per cent above £250,000. Between those limits, marginal relief produces an effective marginal rate of 26.5 per cent.
Therefore, every pound paid as salary saves between 19 and 26.5 pence of corporation tax. That saving is the main reason a full salary can compete in the salary or dividends comparison for a profitable company.
National Insurance: The 15 Per Cent Employer Charge and the Sole Director Trap
The cost of salary is National Insurance. HMRC's rates and thresholds for employers in 2026 to 2027 set the lower earnings limit at £6,708, the primary threshold at £12,570, the secondary threshold at £5,000 and the upper earnings limit at £50,270. Employees pay 8 per cent between the primary threshold and the upper earnings limit, and 2 per cent above it. Employers pay 15 per cent on everything above £5,000.
Additionally, the £10,500 Employment Allowance is not available to every company. HMRC's single director guidance on the Employment Allowance confirms that a company cannot claim it where its only employee paid above the secondary threshold is a director. Many American founders run exactly this kind of company. As a result, their employer National Insurance is payable in full from the first £5,001 of salary, which shifts the salary or dividends maths against salary at lower profit levels.
Dividend Tax After the April 2026 Rise
From 6 April 2026, the dividend ordinary rate rose to 10.75 per cent and the upper rate to 35.75 per cent, while the additional rate stayed at 39.35 per cent. The dividend allowance remains £500. HMRC sets out the current position on its tax on dividends page. Dividends carry no National Insurance, which has always been their main attraction.
However, that two-point rise narrowed the gap considerably. For many owners, the conventional answer to salary or dividends now depends far more on the corporation tax rate than it did a year ago.
Comparing £100 of Profit at Each Rate Band
The clearest way to compare salary or dividends is to follow £100 of company profit through each route. Paid as salary, the £100 must also cover employer National Insurance, so the gross salary is about £86.96. Paid as a dividend at the 25 per cent corporation tax rate, the shareholder receives £75 before personal tax.
For a basic-rate taxpayer, salary leaves about £62.61 after 20 per cent income tax and 8 per cent National Insurance, while the dividend leaves £66.94. Dividends win comfortably. For a higher-rate taxpayer with salary above the upper earnings limit, salary leaves £50.43 and the dividend £48.19. For an additional-rate taxpayer, salary leaves £46.09 and the dividend £45.49. Notably, on the 19 per cent small profits rate dividends still win in every band, because the corporation tax cost is lower. Consequently, the higher your profits and your personal rate, the less the traditional low-salary model saves you, even before the IRS is involved.
How the IRS Sees Salary and Dividends From Your Own Company
As a US citizen, you report worldwide income on Form 1040 every year, and the US tax return preparation for expats that follows treats salary and dividends as different categories of income. The American treatment of salary or dividends is where most of the hidden cost sits.
Salary Is Earned Income: Exclusion or Credit
Salary from your UK company is foreign earned income. Accordingly, you can either exclude up to $132,900 of it for 2026 under the foreign earned income exclusion, or claim a credit for the UK income tax on it using Form 1116. For an owner paying UK income tax at 40 or 45 per cent, the credit nearly always wins. The UK tax usually exceeds the American tax on the same pay, and the exclusion has two drawbacks: UK tax on excluded income cannot be credited, and revoking the election locks you out of it for five years.
Importantly, UK National Insurance is not creditable at all. IRS Publication 514 denies a credit for social security taxes paid to a country with which the US has a totalisation agreement, and the UK has one. Furthermore, a UK company paying you for work done in Britain does not bring you within US Social Security tax, as the IRS guidance on totalization agreements explains. So you pay into one system only.
Dividends Are Qualified, but Not Excluded
A dividend is never earned income, so the foreign earned income exclusion cannot touch it. On the other hand, a dividend from a UK trading company is normally a qualified dividend, because the company is eligible for the benefits of the US-UK income tax treaty, which HMRC publishes alongside its USA tax treaty documents. For 2026, qualified dividends are taxed at 15 per cent above $49,450 of taxable income for a single filer and at 20 per cent above $545,500.
Because UK dividend tax at 35.75 or 39.35 per cent is far higher than those American rates, the foreign tax credit normally eliminates the federal income tax on the dividend. Nevertheless, a rate-differential adjustment shrinks the foreign-source dividend inside the credit fraction, so the credit limit is smaller than many owners expect. As a result, excess UK credits build up every year that dividends are paid.
The Look-Through Rule That Keeps Dividends Out of the Passive Basket
Many advisers assume that a dividend is passive income for credit purposes. However, section 904(d)(3) of the Internal Revenue Code provides that a dividend from a controlled foreign corporation to its US shareholder is not treated as passive category income where the company earns active trading profits. Instead, it follows the character of the underlying earnings, which for a trading company means the general basket.
This matters more than it sounds. Because dividends and salary share the general basket, excess UK credits from one can absorb American tax on the other. Moreover, credits carried forward for up to ten years can shelter later general-category income, such as a UK pension in retirement. Getting the basket wrong is one of the most common errors we correct on returns prepared elsewhere, and it distorts any salary or dividends comparison built on them.
The 3.8 Per Cent Net Investment Income Tax Nobody Can Credit
The decisive American factor in the salary or dividends question is the net investment income tax. Under section 1411, it charges 3.8 per cent on dividends once modified adjusted gross income exceeds $200,000 for a single filer or $250,000 for a joint filer. Those thresholds are fixed in the statute and do not rise with inflation.
Crucially, the tax sits outside the income tax chapter, so the IRS does not allow UK tax to offset it, and the courts have upheld that position. Salary, by contrast, is not investment income, and wages from a UK employer fall outside the American Medicare tax as well. Therefore, every pound you take as a dividend above the threshold costs 3.8 per cent more than the same pound taken as salary. Notably, the foreign earned income exclusion does not escape the tax either, because excluded salary is added back when the threshold is measured.
Retained Profits, NCTI and the Choice Not to Pay Out
The salary or dividends comparison assumes you want the cash now. Yet many wealthy owners do not, and the treatment of retained profits is where the dividend route recovers its value.
The High-Tax Exclusion and the 18.9 Per Cent Line
A UK company controlled by a US person is a controlled foreign corporation. Its active profits are therefore potentially taxable to you each year as net CFC tested income, the regime that replaced GILTI for tax years beginning after 31 December 2025. The Form 8993 instructions explain the related section 250 deduction, which is now 40 per cent.
However, an annual high-tax exclusion election removes income taxed abroad at more than 18.9 per cent, which is 90 per cent of the 21 per cent US corporate rate. A UK company paying the 25 per cent main rate usually clears that line easily. In contrast, a company on the 19 per cent small profits rate clears it by only 0.1 of a point, and timing differences between UK capital allowances and US depreciation can push the US-measured rate below it. Paying a salary reduces profits in both systems equally, so the salary or dividends choice does not by itself spoil the test.
The Section 962 Election and Later Distributions
Where the high-tax exclusion is unavailable, a section 962 election lets you be taxed on the inclusion as if you were a corporation, with a 90 per cent credit for the UK corporation tax. The catch arrives later. Under section 962(d), a subsequent dividend is taxable to the extent it exceeds the American tax already paid on those earnings. Because the UK is a treaty country, that later dividend can still be qualified, which is not true for companies in non-treaty jurisdictions such as Hong Kong.
Why Deferral Is the Real Advantage of Dividends
A salary must be paid and taxed in the year it is earned. In contrast, profits left in the company bear only UK corporation tax until you choose to distribute them, and a well-managed high-tax exclusion keeps them out of your US return entirely. Viewed this way, salary or dividends is also a timing decision. You can time dividends for a year when your other income is lower, when you have moved to a lower-tax jurisdiction, or when the company is being sold.
Consequently, the honest answer to salary or dividends for an American owner is often a third option: pay a salary for the cash you need, and leave the rest invested inside the company. Our cross-border tax planning service models all three paths before the year-end accounts are signed.
Case Study: Salary or Dividends for an American Founder in London
The following illustrative case shows how the salary or dividends decision plays out for a typical client. The figures use 2026/27 UK rates, 2026 US rates and an assumed exchange rate of $1.30 to the pound.
The Facts
Caroline is a New York-born US citizen who has lived in London for nine years. She owns 100 per cent of a strategy consultancy that is UK resident, and she is its only director and only employee. In 2026/27 the company makes £400,000 of profit before her pay. She files as single on her American return, and she wants to extract the full profit this year to fund a property purchase, so her salary or dividends choice is about cash now rather than deferral. Because her income exceeds £125,140, she has no UK personal allowance.
Option One: Minimum Salary and Large Dividends
Following the classic model, Caroline takes a £12,570 salary. The company pays £1,135.50 of employer National Insurance and £96,574 of corporation tax at 25 per cent, leaving £289,721 to distribute. Her UK income tax is £2,514 on the salary and £103,616 on the dividends. She keeps £196,160 after UK tax.
On her US return, the federal income tax before credits is roughly $49,100, and the UK income tax of about $138,000 wipes it out through Form 1116. However, the dividends push her well above the $200,000 threshold, so the net investment income tax adds about $7,330, or £5,641. That leaves her with £190,519.
Option Two: Full Salary
Alternatively, Caroline pays herself the whole profit as salary. After employer National Insurance of £51,522, the gross salary is £348,478 and the company pays no corporation tax. Her UK income tax is £143,018 and her employee National Insurance is £8,980. She keeps £196,480, which is £320 more than option one before the US return is considered.
On the American side, the federal tax before credits is about $121,700. In contrast, the UK income tax of about $185,900 exceeds it comfortably, so the foreign tax credit leaves nothing to pay. Because salary is not investment income, no net investment income tax arises. Caroline therefore keeps the full £196,480.
The Result
Option two leaves Caroline about £5,960 better off every year. Over a decade, that is close to £60,000 on the same profits. Additionally, the salary builds a UK State Pension record and full relevant earnings for pension contributions. Nevertheless, option one would have been the better choice had Caroline been happy to leave most of the profit in the company, because the retained earnings would have borne only the 25 per cent corporation tax. The lesson is that the salary or dividends question has no fixed answer for an American; it depends on how much cash you need and when.
Factors That Tip Salary or Dividends Either Way
Beyond the headline rates, several smaller factors push the salary or dividends decision one way or the other. We review each one with clients every year.
State Pension Years, Totalisation and Pension Contributions
A salary at or above the £6,708 lower earnings limit earns a qualifying year for the UK State Pension, and those years can also count towards American Social Security eligibility under the totalisation agreement. Moreover, only salary counts as relevant UK earnings for personal pension tax relief. Alternatively, the company can make employer pension contributions, which avoid National Insurance and are deductible, while article 18 of the treaty can protect them on your US return within American limits.
Scottish Taxpayers
Scottish income tax applies to salary but not to dividends. Accordingly, a Scottish taxpayer facing a 48 per cent top rate on salary sees the balance tip back towards dividends. HMRC explains the current Scottish income tax bands. For a Scottish resident American, the net investment income tax narrows that advantage but rarely removes it, so the salary or dividends answer differs north of the border.
Using Foreign Tax Credit Carryforwards
Both routes generate excess UK credits, because UK rates exceed American ones. Those credits are only valuable if you will later have general-category income taxed lightly in the UK. For instance, an owner planning to retire to the United States or to sell the company may be able to use them. Therefore, we track the carryforward pool every year rather than letting it lapse unnoticed after ten years.
Timing, Exchange Rates and the Accrual Election
The UK tax year ends on 5 April, while the American year ends on 31 December. A dividend paid in March and a salary paid monthly fall into different US years for credit purposes. Consequently, whatever your answer to salary or dividends, we usually recommend the election to claim foreign tax credits on the accrual basis, which matches the UK tax to the year the income is earned. Each dividend must also be converted at the exchange rate on the date it is paid.
Missed Reporting When an American Owns a UK Company
Whichever answer you reach on salary or dividends, owning a UK company brings American information returns that many owners have never filed. These carry penalties out of all proportion to the tax involved.
Form 5471, FBAR and Form 8938
As a controlling US shareholder, you must attach Form 5471 to your return every year, and the penalty for a missed form starts at $10,000 per form per year. Furthermore, signature authority over the company's bank accounts, or ownership of more than half of the company, brings those accounts within the FinCEN FBAR requirement once the combined maximum balance of all your foreign accounts exceeds $10,000. Your shares may also need to appear on Form 8938. Our FBAR and FATCA reporting service handles both.
The new UK return boxes for directors make these gaps more visible. As we explain in our guide to close company director disclosures, HMRC now asks every director for the company's name, registration number and dividends. Similarly, owners who split income with a spouse should read our analysis of dividend waivers in UK family companies before relying on one.
Catching Up on Missed US Tax Returns
If you have missed US tax returns, a missed FBAR or Form 5471, the route back depends on whether the failure was non-wilful. For most owners who simply did not know, the IRS Streamlined Filing Compliance Procedures allow three years of returns and six years of FBARs to be filed without failure-to-file penalties. Our IRS Streamlined filing service prepares the full package, including the company forms. Where the issue is a single late information return, a different procedure may be cheaper.
How TaxYork Can Help
TaxYork prepares US and UK tax returns for American owner-directors as a single engagement, so the salary or dividends decision is modelled on both returns before the company's year-end. We calculate the UK corporation tax, National Insurance and income tax, then the American income tax, foreign tax credits, net investment income tax and controlled foreign corporation position. We also prepare Form 5471, Form 8993, Form 1116, the FBAR and Form 8938.
Furthermore, where treaty positions are involved, our US-UK tax treaty service handles the article 18 pension and qualified dividend analysis. For owners with gaps in earlier years, we correct the missed reporting at the same time. In our experience, the first year of joined-up preparation typically saves an owner far more than it costs.
Conclusion
For a British shareholder, salary or dividends is a well-worn question with a familiar answer. For an American, the answer changes. The April 2026 dividend rise has already made salary competitive at the higher and additional rates for companies paying 25 per cent corporation tax. On top of that, the uncreditable 3.8 per cent net investment income tax falls on dividends but not on salary. Meanwhile, retained profits protected by the high-tax exclusion remain the strongest argument for the dividend route.
Therefore, the right answer depends on your corporation tax rate, your personal tax band, where you live in the UK and how much cash you need this year. Model your salary or dividends mix on both returns before you set your pay, not after.
Contact Us
If you own a UK company and want the salary or dividends decision modelled on both returns, please book a consultation with our team. You can also email hello@taxyork.com or call 020 3488 8606. We prepare US and UK returns for American owner-directors, investors and dual nationals across Britain.
Disclaimer
This article is for general information only and does not constitute tax, legal or investment advice. US and UK tax rules change frequently, and the right balance between salary and dividends depends on your residence, income, company profits and filing history. The case study is illustrative, uses an assumed exchange rate and does not describe a real client. You should obtain professional advice on your own circumstances before acting on anything in this article. Further background is available from the Chartered Institute of Taxation and the ICAEW. TaxYork accepts no liability for any loss arising from reliance on this article.