Salary vs Dividends: The Optimal Director Pay Strategy for 2025/26
The most tax-efficient way to pay yourself as a UK company director in 2025/26 is to take a small salary up to the NI threshold (£12,570) and the rest as dividends. This approach can save thousands compared to taking a full salary.
Why the Split Matters
Salary and dividends are taxed differently:
- Salary: Subject to Income Tax (20-45%) and National Insurance (both employer and employee)
- Dividends: Subject to Income Tax at lower rates (8.75%, 33.75%, or 39.35%) and zero National Insurance
By splitting your income, you minimise the total tax paid across both personal and company levels.
The Optimal Strategy for 2025/26
Step 1: Take a Salary of £12,570
This equals the Personal Allowance, meaning:
- No Income Tax on the salary (fully covered by the Personal Allowance)
- No employee NI (below the Primary Threshold)
- No employer NI (below the Secondary Threshold)
- The salary is a deductible business expense, reducing your Corporation Tax bill
Step 2: Take Remaining Profits as Dividends
After paying Corporation Tax (25% for profits over £250,000, or 19-25% with marginal relief), distribute profits as dividends:
- First £500 of dividends is tax-free (dividend allowance)
- Next £37,700 is taxed at 8.75% (basic rate)
- £37,701 to £125,140 is taxed at 33.75% (higher rate)
- Above £125,140 is taxed at 39.35% (additional rate)
Worked Example
Let's say your company made £80,000 profit before your salary:
| Salary Only | Salary + Dividends | |
|---|---|---|
| Salary | £80,000 | £12,570 |
| Employer NI | ~£9,300 | £0 |
| Employee NI | ~£4,600 | £0 |
| Income Tax on salary | ~£14,400 | £0 |
| Corporation Tax | £0 | ~£16,857 |
| Dividend Tax | £0 | ~£3,900 |
| Total Tax | ~£28,300 | ~£20,757 |
| Savings | — | ~£7,543 |
That's over £7,500 saved by simply restructuring how you take money from your company.
Important Considerations
Pension Contributions
Salary counts as "relevant UK earnings" for pension contributions. If you want to make larger pension contributions, you may need to increase your salary. Employer pension contributions are also Corporation Tax deductible.
Mortgage Applications
Lenders typically look at salary plus dividends for mortgage affordability. Some prefer higher salaries. If you're planning a mortgage application, discuss the timing with your accountant first.
IR35 and Contractors
If you work through a personal service company and your contracts fall inside IR35, the deemed payment rules may apply, and the salary vs dividend choice may not be available.
Retained Profits
You don't have to extract all profits each year. Retaining profits in the company can be useful for future investment, and you only pay Corporation Tax on profits — no personal tax until you extract them.
Frequently Asked Questions
What is the most tax-efficient salary for a director in 2025/26? £12,570 per year (£1,047.50 per month). This uses your full Personal Allowance while avoiding National Insurance contributions.
Do I have to pay myself a salary as a director? No, but paying a salary at or above the Lower Earnings Limit (£6,396) qualifies you for State Pension credits, which is important for your future pension entitlement.
Can I change my salary vs dividend split during the year? Salary should remain consistent, but dividend amounts can vary. You need to formally declare dividends with board minutes and dividend vouchers.
Use our free Director Tax Calculator to model your optimal pay structure, or contact us for personalised tax planning advice.
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