The top marginal rate on salary (45% income tax + 2% NI) versus the higher rate of capital gains tax (GOV.UK). How your money arrives decides how much of it you keep — 2025/26 rates, thresholds frozen to 2028.
Same Money, Different Tax
The UK does not have one income tax system — it has several, depending on how money reaches you. Salary, dividends, capital gains and pension income are taxed at different rates with different allowances, and the gaps between them are large. Wealthy households arrange their affairs to receive more of their money through the lightly-taxed channels. That is legal tax planning using rates and allowances Parliament chose to set — quite different from evasion or aggressive avoidance schemes, which HMRC pursues under rules including the General Anti-Abuse Rule. All figures below are 2025/26 (thresholds frozen to 2028).
Route 1: Salary — the Heaviest-Taxed Pound
Employment income carries income tax and National Insurance. On a £200,000 salary the deductions are about £76,203 income tax plus £6,011 employee NI, leaving £117,786 — an effective rate of 41.1%, with a top marginal rate of 47% (45% tax + 2% NI). The employer also pays 15% employer NI on earnings above £5,000 since April 2025 (GOV.UK), which is why total payroll cost far exceeds gross salary. And between £100,000 and £125,140, the personal allowance taper pushes the marginal rate to 62% — the £100k tax trap.
Route 2: Dividends — No NI, Lower Rates
Company owners can pay themselves in dividends instead. Dividend tax rates are 8.75% (basic), 33.75% (higher) and 39.35% (additional), with a £500 tax-free dividend allowance (GOV.UK: Tax on dividends) — and crucially, no National Insurance. The company pays corporation tax first: 19% on profits up to £50,000, 25% above £250,000, with marginal relief between (GOV.UK).
| £150,000 of personal income (2025/26) | Taken as salary | Taken as dividends |
|---|---|---|
| Income tax on salary | £53,703 | — |
| Employee National Insurance | £5,011 | £0 |
| Dividend tax | — | £42,548 |
| You keep | £91,286 | £107,452 |
The dividend column looks better — but remember dividends are paid from post-corporation-tax profit, so the fair comparison for an owner-manager includes the company's 19–25% first. Our salary vs dividends article works the combined sums.
Route 3: Capital Gains — the Investor's Rate
Selling assets at a profit is taxed under capital gains tax, not income tax. For 2025/26 disposals the rates are 18% (basic-rate taxpayers) and 24% (higher/additional) across all asset classes, with a £3,000 annual exempt amount (GOV.UK: Capital Gains Tax rates). Business Asset Disposal Relief taxes qualifying business sales at 14% in 2025/26, rising to 18% from April 2026 (GOV.UK). Compare a £100,000 gain taxed at 24% (£24,000) with £100,000 of extra salary for someone already in the additional-rate band at 47% (£47,000) — nearly double. This is the core reason founders and investors, whose rewards arrive as gains, face lower rates than high-salaried employees.
Route 4: Pensions — Deferral at Full Relief
Pension contributions get tax relief at your marginal rate, grow tax-free, and are taxed only when drawn (usually with 25% tax-free). The annual allowance is £60,000, but it tapers by £1 for every £2 of adjusted income above £260,000, down to a £10,000 floor once adjusted income reaches £360,000 (HMRC rules explained by MoneyHelper). For someone in the £100,000–£125,140 taper zone, a pension contribution effectively earns relief at 62% — the single most efficient move in UK personal tax. ISAs do the opposite job: no relief going in, but the £20,000 a year you shelter grows and pays out entirely tax-free (GOV.UK).
Putting It Together
| Channel | Top rate (2025/26) | NI due? | Key allowance |
|---|---|---|---|
| Salary | 45% + 2% NI = 47% | Yes | £12,570 personal allowance (tapered £100k+) |
| Dividends | 39.35% | No | £500 dividend allowance |
| Capital gains | 24% (BADR 14%) | No | £3,000 annual exempt amount |
| Pension (going in) | Relief at up to 62% | Sacrifice saves NI too | £60,000 allowance, tapered to £10,000 |
| ISA returns | 0% | No | £20,000 a year |
A typical high-earner structure therefore looks like: salary to a sensible level, dividends from owned companies, gains realised deliberately against the annual exempt amount and lower-rate years, maximum feasible pension (watching the taper), and ISAs filled every April. Wealthier families sometimes add corporate wrappers — see our overview of family investment companies.
Perspective check. The UK median full-time salary is £39,039 (ONS Annual Survey of Hours and Earnings, April 2025), taxed almost entirely through PAYE at an effective 19.0%. Most of the structuring above only becomes worthwhile with income well into six figures or meaningful investment assets — and anything beyond pensions and ISAs deserves professional advice, because anti-avoidance rules (settlements legislation, the GAAR, targeted rules on close companies) police the boundaries.
Frequently Asked Questions
Is it legal to pay yourself in dividends instead of salary?
Yes — owner-managers routinely take a small salary plus dividends. Dividends carry no NI and lower headline rates (GOV.UK), but they are paid from post-corporation-tax profit and don't build state benefit entitlement by themselves, so the right mix is a real calculation, not a default.
Why is capital gains tax lower than income tax?
Parliament sets CGT rates separately: 18%/24% for 2025/26 against income tax of up to 45% plus NI (GOV.UK). Successive governments have kept gains rates lower, citing investment incentives and the fact that gains often reflect inflation and risk — a live policy debate, but that is the current law.
What is the most tax-efficient income in the UK?
Pension contributions (relief up to 62% in the £100k–£125,140 taper zone, then tax-deferred growth) and ISA returns (completely tax-free) beat everything else for most people. Beyond those wrappers, capital gains at 24% or less are taxed more lightly than salary at up to 47% marginal.
Do the wealthy pay less tax than employees?
They pay lower rates on some income types. A pound of salary can lose 47% at the top; a pound of capital gain loses at most 24%. Whether total burdens are lower depends on how income is composed — which is precisely why composition, not rate-dodging, is what legal structuring changes.
Related Guides
Keep reading with these related guides and articles:
- Family Investment Companies — the corporate wrapper wealthy families use
- Salary vs Dividends — the owner-manager sums in full
- Workplace Pensions Explained — the most powerful wrapper of all
- How to Reduce Tax Legally — the everyday version of this playbook
- The £100k Tax Trap — the 62% marginal zone explained
- High Earner Tax Tips — practical moves for six-figure earners
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