If you are a director of a UK limited company, the question of how to pay yourself comes up every year. And the answer changes when tax rates move.
For 2025/26, the most tax efficient salary and dividend split 2025 26 is a salary set at £12,570 (the personal allowance) and dividends taken up to the top of the basic rate band at £50,270. That means dividends of roughly £37,700 on top of the salary.
This combination keeps your total income within the basic rate band, avoids employee and employer National Insurance on the salary (where the Employment Allowance covers it), and uses the lower dividend tax rates. We work through the exact figures below, plus the scenarios where this standard approach needs adjusting.
The Standard Director Pay Strategy for 2025/26
The logic is simple. You want to extract profit from your company in the way that minimises the combined tax charge on you and the company. That means balancing corporation tax, income tax, National Insurance, and dividend tax.
Here is the standard structure that works for most profitable limited companies with one or two directors.
Salary: £12,570
Set your salary at the personal allowance threshold of £12,570. This is also the primary threshold for National Insurance, meaning no employee NI is due on this salary. The secondary threshold for employer NI is £9,100, so a salary of £12,570 would normally trigger employer NI of 13.8% on the excess of £3,470. That is £478.86 in employer NI.
However, if your company is eligible for the Employment Allowance (most companies with a single director are not, but companies with multiple employees or multiple directors often are), that employer NI is covered. The Employment Allowance for 2025/26 is up to £10,500. If your total employer NI across all staff is below that, you pay zero employer NI.
The salary is tax deductible for the company. It reduces your corporation tax profit. At 19% corporation tax, that £12,570 saves the company £2,388.30 in tax. The director receives the full £12,570 with no tax or NI deducted at source.
Dividends: Up to £37,700
After the salary, your basic rate band runs from £12,571 to £50,270. That is £37,700 of headroom. You can take dividends up to that amount and pay only basic rate dividend tax of 8.75% on the amount above the dividend allowance.
The dividend allowance for 2025/26 is £500. So on £37,700 of dividends, the first £500 is tax free. The remaining £37,200 is taxed at 8.75%. That gives a dividend tax bill of £3,255.
Dividends are paid from post-corporation tax profits. The company pays 19% corporation tax on the profit before distributing it as a dividend. That is the trade-off: you save income tax and NI on the salary side, but dividends come out of already-taxed profits.
The Full Calculation: What You Actually Keep
Let us run the numbers for a director with a profitable company in 2025/26. Assume the company makes £100,000 profit before director pay.
Option: Salary £12,570 + Dividends £37,700 = Total income £50,270
- Company profit before pay: £100,000
- Salary deduction: £12,570
- Employer NI (if not covered by Employment Allowance): £478.86
- Corporation tax profit after salary and NI: £86,951.14
- Corporation tax at 19%: £16,520.72
- Profit after tax available for dividends: £70,430.42
- Dividends paid to director: £37,700
- Dividend tax due: £3,255 (8.75% on £37,200)
- Director net income after all tax: £50,270 - £3,255 = £47,015
- Retained profit in company: £32,730.42
Your effective tax rate on the £50,270 extracted is about 6.5% (just the dividend tax on the excess over the allowance). That is hard to beat.
Compare that to taking the same £50,270 as salary only. You would pay employee NI at 8% on earnings above £12,570, employer NI at 13.8% on earnings above £9,100, and income tax at 20% on earnings above £12,570. The total tax and NI bill would be around £12,000 to £14,000, depending on the exact mix. The dividend route saves thousands.
When the Standard Split Does Not Work
The £12,570 salary plus £37,700 dividends approach works well for profitable companies where the director wants to extract up to the basic rate band. But it is not universal. Here are the situations where you need a different approach.
You Have Other Income
If you have rental income, a second job, or a pension, your basic rate band is already partly used. Dividends taken above the remaining headroom attract higher rate dividend tax at 33.75%. You need to model the full picture before declaring dividends.
Your Company Is Not Profitable Enough
If your company makes only £20,000 profit, you cannot pay yourself £12,570 salary and £37,700 dividends. The company needs retained profits to support the dividend. You cannot declare a dividend that would create a negative profit and loss reserve. Doing so is illegal under the Companies Act 2006.
You Are a Sole Director with No Other Employees
If you are the only director and have no other staff, you cannot claim the Employment Allowance. That means the salary of £12,570 triggers employer NI of £478.86. Some directors choose a salary of £9,100 (the secondary threshold) to avoid employer NI entirely, then take the rest as dividends. The tax saving from the lower salary is marginal, but it avoids the employer NI cash outflow.
For 2025/26, the numbers look like this with a £9,100 salary:
- Salary: £9,100 (no employer NI, no employee NI, no income tax)
- Dividends: up to £41,170 (basic rate band of £50,270 minus £9,100)
- Dividend tax: 8.75% on £40,670 after the £500 allowance = £3,558.63
- Total net income: £50,270 - £3,558.63 = £46,711.37
Compared to the £12,570 salary route, you lose about £303 in net income but save the £478.86 employer NI. The £12,570 route still wins if the Employment Allowance is available. If not, the difference is small enough that either approach is reasonable.
You Want to Extract More Than £50,270
Once your total income exceeds £50,270, you enter the higher rate band. Dividend tax jumps from 8.75% to 33.75%. That is a big leap. At that point, you need to decide whether to leave profit in the company (paying 19% or 25% corporation tax) or extract it and pay the higher dividend tax.
There is no single right answer. It depends on your long-term plans. If you plan to sell the company and use Business Asset Disposal Relief (BADR), retaining profit inside the company and extracting it on sale at 14% CGT (2025/26 rate) may be better. If you need the cash for personal spending, you pay the 33.75% dividend tax and move on.
Dividend Tax Rates for 2025/26
Here are the dividend tax rates that apply for 2025/26:
- Basic rate (income up to £50,270): 8.75% on dividends above the £500 allowance
- Higher rate (income £50,271 to £125,140): 33.75% on dividends above the £500 allowance
- Additional rate (income above £125,140): 39.35% on dividends above the £500 allowance
The dividend allowance itself dropped to £500 from April 2024. It stays at £500 for 2025/26. There is no indication the government plans to increase it.
Corporation Tax Interaction
Corporation tax rates for 2025/26 are:
- 19% on profits up to £50,000
- Marginal relief between £50,000 and £250,000
- 25% on profits above £250,000
If your company profit after salary is below £50,000, you pay the small profits rate of 19%. That is the sweet spot for the standard salary and dividend strategy. If your company profit pushes above £50,000, the effective corporation tax rate increases gradually to 25%.
That changes the maths slightly. At 25% corporation tax, retaining profit in the company is more expensive. Extracting it as dividends and paying the higher dividend tax may still make sense, but the gap narrows. We run these scenarios for clients on a case-by-case basis.
Spouse and Family Directors
If you run the company with your spouse or a family member, you can split the salary and dividends between two directors. That doubles the basic rate band. Two directors can extract up to £100,540 combined (£50,270 each) at basic rates.
The structure works like this:
- Director 1: salary £12,570, dividends £37,700
- Director 2: salary £12,570, dividends £37,700
- Total extracted: £100,540
- Total dividend tax: £6,510 (two lots of £3,255)
That is a highly tax efficient way to run a family business. But you must ensure both directors genuinely contribute to the business. HMRC can challenge dividend allocations where shares are held by someone who does no work and has no real involvement. The settlement legislation applies to spouses and civil partners, so a gift of shares to a non-working spouse can trigger a tax charge on the original shareholder.
Alphabet shares are common in this structure. They allow the company to pay different dividend rates to different shareholders, even though they hold the same class of share. We use them regularly for family companies.
Pension Contributions as an Alternative
Instead of taking dividends above the basic rate band, many directors make pension contributions from the company. Company pension contributions are corporation tax deductible and do not trigger NI. The director gets the full contribution into their pension, subject to the annual allowance of £60,000 (with tapering above £260,000 adjusted income).
For a director in the higher rate band, a pension contribution saves 33.75% dividend tax on the amount not taken as a dividend, plus the corporation tax saving on the contribution itself. It is often the most efficient option for extracting value above the basic rate band, provided you do not need the cash now.
Practical Steps: How to Set Up the Pay Mix
If you are a new director or reviewing your current setup for 2025/26, here is what to do:
- Set up a payroll for yourself. Use software like Xero, FreeAgent, or BrightPay. Process the salary monthly or annually. Many directors process the full £12,570 in month 12 to keep administration low, but check your payroll software can handle a one-off payment without triggering NI incorrectly.
- Run a Real Time Information (RTI) submission to HMRC each time you process payroll. This is mandatory.
- Declare dividends using board minutes and a dividend voucher. The voucher must state the date, the amount, and the shareholder. Keep a copy in your company records.
- Pay the dividend from distributable reserves. Do not pay a dividend if your profit and loss account shows a negative balance.
- Report dividends on your personal self assessment tax return (SA100). Dividends go in the dividend pages. HMRC will calculate the tax due.
If you are unsure about any step, speak to an accountant. The cost of getting it wrong (illegal dividends, incorrect payroll, missed tax) far outweighs the cost of advice.
Common Traps and Mistakes
Paying salary below the secondary threshold without realising. Some directors set salary at £9,100 to avoid employer NI, then take large dividends. That is fine, but they miss the personal allowance benefit of the extra £3,470 salary. Run the numbers both ways before deciding.
Ignoring the associated company rules. If you control multiple companies, the £50,000 small profits rate threshold is divided between them. Two companies you control each get a £25,000 threshold. That pushes more profit into the marginal relief band or the 25% rate. Plan accordingly.
Forgetting the 9-month rule on director's loan accounts. If you take more out of the company than you put in (including dividends not yet declared), you create a director's loan account overdrawn balance. If it is not repaid within 9 months and 1 day of the year-end, the company pays S455 tax at 33.75% on the outstanding amount. This is refundable when the loan is repaid, but it ties up cash.
Not accounting for the dividend allowance drop. The £500 allowance is low. If you take even small dividends, you will likely exceed it. The tax on £500 of dividends above the allowance is only £43.75 at basic rate, so it is not a disaster. But do not assume you have a £2,000 tax-free allowance like in previous years.
Should You Take a Salary at All?
Some directors consider taking no salary and taking everything as dividends. That is rarely optimal. Without a salary, you do not build up qualifying years for the state pension. You also miss the corporation tax deduction on the salary, meaning more profit is subject to corporation tax.
The salary of £12,570 costs the company very little in net terms (the corporation tax saving offsets most of the cash cost) and secures a state pension year. Take it.
Final Numbers for 2025/26
For a director with a profitable company and no other significant income, the most tax efficient salary dividend split 2025 26 is:
- Salary: £12,570 (no tax, no NI if Employment Allowance applies)
- Dividends: £37,700 (tax at 8.75% on £37,200 = £3,255)
- Total net income: £47,015
- Total personal tax: £3,255
- Effective tax rate on extraction: 6.5%
If the Employment Allowance is not available, consider a salary of £9,100 to avoid employer NI, then dividends of £41,170. The net income is slightly lower, but the cash flow saving on employer NI may be worth it for very small companies.
If you need to extract more than £50,270, use pension contributions first, then accept the higher dividend tax on the excess, or retain profit in the company for future extraction at capital gains rates.
Our ICAEW qualified team at Holloway Davies runs these calculations for clients every day. If your situation is more complex (associated companies, foreign income, multiple directors, or a mix of employment and self-employment), get in touch for a tailored review.
For more on the fundamentals of director pay, see our guide to limited company fundamentals. And if you are considering incorporating, read our incorporation page for the tax implications.