If you run your own limited company, the salary-versus-dividends question comes up every year. The right split can make a meaningful difference to how much of your company’s profit you actually keep.
This guide covers the key rates, thresholds and considerations for 2025/26 — including the changes to employer National Insurance that took effect in April 2025. As always, your individual circumstances affect the optimal approach, so treat this as a starting point and take advice from your accountant.
Why the Split Matters
As a director-shareholder of a limited company, you control how you take money out of the business. The two main routes are:
- Salary — a payment through PAYE, subject to Income Tax and National Insurance (both employee and employer contributions)
- Dividends — distributions from company profits after Corporation Tax has been paid, taxed at lower dividend rates
Because dividends are taxed at lower rates than salary (and are free of National Insurance), most owner-managed company directors use a combination: a modest salary to maintain pension entitlement and NI contributions record, then dividends to extract the rest.
The 2025/26 Rate Card
Corporation Tax
| Company profits | Rate |
|---|---|
| Up to £50,000 | 19% (Small profits rate) |
| £50,001 to £250,000 | Marginal rate (19%–25%) |
| Over £250,000 | 25% (Main rate) |
Income Tax (Personal)
| Band | Rate | Taxable income |
|---|---|---|
| Personal Allowance | 0% | Up to £12,570 |
| Basic rate | 20% | £12,571 to £50,270 |
| Higher rate | 40% | £50,271 to £125,140 |
| Additional rate | 45% | Over £125,140 |
Dividend Tax Rates 2025/26
| Taxpayer band | Rate | Dividend allowance |
|---|---|---|
| Basic rate | 8.75% | First £500 tax-free |
| Higher rate | 33.75% | First £500 tax-free |
| Additional rate | 39.35% | First £500 tax-free |
Dividend allowance cut: The tax-free dividend allowance fell from £1,000 in 2024/25 to £500 in 2025/26. It was £5,000 as recently as 2017/18. If you have multiple years of company profits banked, it is worth planning dividend timing carefully.
National Insurance 2025/26
| Contribution | Rate | Threshold |
|---|---|---|
| Employee NI (Class 1) | 8% | On earnings £12,570–£50,270 |
| Employee NI (Class 1) | 2% | On earnings above £50,270 |
| Employer NI (Class 1) | 15% | On earnings above £9,100 |
Employer NI increase (April 2025): The employer NI rate rose from 13.8% to 15% in April 2025. The secondary threshold (where employer NI kicks in) also dropped from £9,100 to £5,000 per employee — except for director-only companies. For director-only companies, the secondary threshold remains at £9,100. The Employment Allowance increased to £10,500 and is now available to more small employers.
What Is the Optimal Salary in 2025/26?
Most director-shareholders fall into one of two groups depending on whether the company can claim the Employment Allowance:
If Your Company Has Employees (Employment Allowance available)
The Employment Allowance rose to £10,500 for 2025/26. If your company employs staff in addition to yourself, it can almost certainly claim this, wiping out employer NI on the first £10,500 of employer NI liability.
In this scenario, the optimal director salary is typically £12,570 (the full personal allowance). Taking salary at this level:
- Uses your full personal allowance, so no Income Tax on the salary
- Employer NI of 15% applies on earnings above £9,100, so £3,470 x 15% = £521 employer NI
- With the Employment Allowance, this employer NI is offset
- Employee NI: the primary threshold is £12,570, so no employee NI at this salary level
- The salary is a deductible expense, saving Corporation Tax
If You Are a Sole Director with No Other Employees
Director-only companies with no other employees cannot claim the Employment Allowance. HMRC excluded sole director companies from this relief from April 2020.
In this situation, many accountants recommend a salary at or close to the secondary NI threshold: £9,100. At this level:
- No employer NI (earnings are at or below the £9,100 threshold)
- No employee NI
- No Income Tax (well below the £12,570 personal allowance)
- The salary maintains your State Pension entitlement (earnings above £6,396 count toward NI record)
Alternatively, some sole directors take a £12,570 salary. The analysis: the extra £3,470 triggers employer NI of £521, but the salary deduction saves Corporation Tax of roughly £659 (at 19%). Net benefit: approximately £138. Whether the extra admin is worth £138 is a judgement call best made with your accountant.
Pension contributions: Director pension contributions made by the company are separately deductible against Corporation Tax, carry no Income Tax or NI for you, and do not count toward the salary/dividend split. They are one of the most tax-efficient ways to extract profit from a company. The annual pension allowance is £60,000 for 2025/26.
How to Fill Your Basic Rate Band with Dividends
Once you have set your salary, fill the remaining basic rate band with dividends. The basic rate band runs from the top of your salary to £50,270.
Example for a sole director taking a £9,100 salary in 2025/26:
- Salary: £9,100 (taxed at 0% — below personal allowance)
- Remaining personal allowance: £12,570 – £9,100 = £3,470
- You can take a further £3,470 as dividends tax-free (covered by remaining personal allowance)
- Then £500 dividends at 0% (dividend allowance)
- Then dividends up to £50,270 total income at 8.75%
- Total you can draw before hitting higher rate tax: £50,270
Key number: For a sole director on a £9,100 salary, dividends of up to approximately £41,170 (£50,270 minus £9,100) fall in the basic rate band. On that £41,170, roughly £3,970 personal allowance and £500 dividend allowance are tax-free; the balance is taxed at 8.75%.
What About Higher Rate Taxpayers?
Once your total income exceeds £50,270, dividend tax jumps from 8.75% to 33.75%. At this point, the tax advantage of dividends over salary narrows considerably.
At higher rate, a dividend costs 33.75% in personal tax. Compare this to the combined burden of a salary at the higher rate: 40% Income Tax plus 2% employee NI (on salary above £50,270) plus 15% employer NI — which makes dividends still meaningfully cheaper.
However, for higher-earning directors, other strategies become relevant:
- Pension contributions — company pension contributions reduce Corporation Tax with no personal tax
- Spouse or partner as shareholder — splitting dividends between shareholders can use additional basic rate band (provided HMRC’s settlements legislation does not apply)
- Retained profits — leave excess profit in the company and draw in a lower-income year
- Timing — drawing dividends in April vs March changes which tax year they fall in
The Personal Allowance Trap (Over £100,000)
If your total income exceeds £100,000, your personal allowance is gradually withdrawn at £1 for every £2 of income above £100,000. Between £100,000 and £125,140, the effective marginal rate is approximately 60%.
Strategies to manage this include making additional pension contributions (which reduce adjusted net income), increasing employer pension payments, or timing dividend payments across tax years.
This is an area where professional advice makes a significant practical difference.
Changes to Watch in 2025/26
- Employer NI up to 15% from April 2025 (was 13.8%). This slightly erodes the tax benefit of salary deductions.
- Secondary NI threshold dropped to £5,000 for most employees (but remains at £9,100 for directors, keeping the optimal director salary calculation unchanged).
- Dividend allowance down to £500 (from £1,000 in 2024/25). More dividends now taxable.
- Employment Allowance up to £10,500 — good news for companies with staff.
A Practical Planning Checklist
- Confirm whether your company can claim the Employment Allowance
- Set your salary at £9,100 (sole director, no EA) or £12,570 (EA available)
- Calculate how much basic rate band remains for dividends
- Consider company pension contributions before drawing dividends
- Check if a spouse or civil partner could be a shareholder (take legal and tax advice first)
- If total income may exceed £100,000, plan pension contributions to protect your personal allowance
- Review the plan at each tax year-end in case rates or your income level changes
Want Us to Work Out Your Optimal Split?
Every director’s situation is different. We’ll calculate the most tax-efficient salary and dividend combination for your company’s profit level and personal circumstances — at no obligation.
All figures are based on 2025/26 tax rates. Tax laws may change. This article is for general information only and does not constitute personal tax advice. Individual circumstances vary considerably — please consult a qualified accountant before making decisions about your remuneration strategy.
