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.
