A practical guide to balancing salary and dividends for maximum tax efficiency.
Paying yourself correctly as a director could save you thousands. Here's how to structure your income smartly using a mix of salary, dividends, and allowances for 2025/26.
How should a director pay themselves in 2025/26?
For 2025/26 most directors pay themselves a £12,570 salary (using the full Personal Allowance, per HMRC) topped up with dividends. The first £500 of dividends is tax-free, then 8.75% within the basic-rate band up to £50,270 and 33.75% above it. This salary-plus-dividend mix avoids employee National Insurance while keeping the company's Corporation Tax deduction on the salary.
Why Director Pay Needs Smart Planning
As a company director, you have flexibility in how you extract income — but smart planning is critical.
The wrong structure could mean unnecessary Income Tax, Dividend Tax, or National Insurance Contributions (NICs).
Salary vs Dividends: The Key Differences
Item | Salary | Dividends |
Tax Treatment | Income Taxed via PAYE | Separate Dividend Tax rates |
NICs | Attracts employee and employer NICs | No NICs payable |
Company Deductibility | Yes, reduces Corporation Tax | No deduction allowed |
Pensionable | Yes | No |
Both have advantages, but a combination usually achieves the best overall result.
The Smart Salary Level for 2025/26
✅ £12,570 salary is the "sweet spot" for most directors:
- Utilises your full personal allowance tax-free.
- No employee NICs triggered at this level.
- Qualifies you for state pension and benefits.
- Employer NICs normally apply once salary exceeds £5,000 — but Employment Allowance may cover it (explained below).
Important: If you are the only employee and director, you normally cannot claim Employment Allowance.
Using Dividends Wisely
✅ After salary, take additional income via dividends, making full use of the UK dividends allowance:
- First £500 of dividends is tax-free (the UK dividend allowance for 2025/26, per HMRC).
- Dividends in the basic-rate band (up to £50,270) taxed at 8.75%.
- Dividends in the higher-rate band (£50,270 to £125,140) taxed at 33.75%.
- Dividends above £125,140 (additional rate) taxed at 39.35%.
Best practice:
- Stay within the basic rate band where possible.
- Only pay dividends from available post-tax profits.
- Declare dividends formally (with board minutes).
Can You Save Employer NICs Too?
Who qualifies?
- Must have at least 2 employees earning above £123/week.
- Sole director-only companies do not qualify.
If eligible:
- You can pay a slightly higher salary (~£13,000+) without incurring employer NICs.
For more ways to keep contributions down, read our guide on how directors can save National Insurance in 2025/26.
Always seek tailored advice for your situation.
Practical Case Study Examples
Example 1:
Sarah is the only director and employee of her consultancy company.
Type | Amount |
Salary | £12,570 |
Dividends | £37,700 |
Total Income | £50,270 |
Tax outcome:
- No Income Tax on salary.
- NIC credits secured.
- Dividends taxed at basic rate (8.75%).
Example 2:
Mark runs a small design agency with one other employee.
- Eligible for Employment Allowance.
- Can pay salary of £13,000 without employer NIC costs.
Then take dividends after that.
Final Recommendations
- Pay yourself a modest salary first to use your personal allowance and secure NIC credits.
- Extract profits via dividends thereafter to minimise tax.
- Review eligibility for Employment Allowance if you employ staff.
FAQs
1. Can I pay myself only in dividends?
Technically yes, but you would miss out on NIC credits and state pension eligibility.
2. How often can I pay dividends?
As often as you like, provided profits are available and proper paperwork is completed.
3. What happens if I pay dividends without sufficient profits?
They are deemed illegal (unlawful) dividends and may trigger personal and company tax consequences. Dividends can only be paid from available post-tax retained profits.
4. Is salary or dividends better for a director?
Most directors use both. A salary up to the £12,570 Personal Allowance is Corporation-Tax-deductible for the company and secures a State Pension qualifying year, while dividends carry no National Insurance and are taxed at the lower 8.75% basic rate. The blended approach is usually the most tax-efficient.
For the bigger picture on running a company tax-efficiently, see our guides on allowable expenses for limited companies and trivial benefits vs employee perks.
