Deciding how to pay yourself as a company director has always been a key tax planning question.
In the 2025/26 tax year, with frozen allowances and increased National Insurance rates, the choice between salary and dividends is more strategic than ever.
We’ve broken down the most tax efficient approaches into two income brackets to help you make the right decision.
(Read Time: Approx. 4 minutes)
Topics Discussed:
- Tax efficient extraction for directors earning below £50k
- Planning for higher income levels and the impact on personal and corporate tax
Understanding Salary and Dividends for Company Directors
If you’re both a director and a shareholder of your limited company, you have the flexibility to draw income in two main ways: salary and dividends.
A salary is a regular payment made to you as an employee through PAYE.
It’s tax deductible for Corporation Tax purposes and can contribute towards your National Insurance record and pension entitlements.
However, salaries are subject to both Income Tax and National Insurance contributions (NICs).
Dividends, on the other hand, are profit distributions paid to shareholders after the company has paid Corporation Tax.
They are not tax deductible for the business, but they carry lower personal tax rates and are free from NICs.
However, they can only be paid if the company is making sufficient post tax profit.
The decision on how to split your income is therefore both personal and strategic.
Strategies for Extracting Less Than £50k
If your goal is to keep your income just below the higher rate threshold, 2025/26 still offers a familiar strategy, blending a minimal salary with tax efficient dividends.
Recommended Structure:
Salary: £12,570 (fully covered by your personal allowance)
Dividends: £37,700
- First £500 is tax free under the dividend allowance
- The remaining £37,200 is taxed at 8.75% = £3,255
Why it works:
- No National Insurance is due at this salary level
- Salary is deductible for Corporation Tax purposes, saving up to 25% for the company
- Dividends avoid both Employee and Employer NI, significantly reducing tax burden
- Keeps total income below the £50,270 higher rate tax threshold
Perfect for:
- Directors with no other significant income
- Spouse or civil partner setups where both are shareholders, allowing each to take home just over £50k
- Businesses not claiming R&D relief or requiring high pension contributions
Bonus tip: If your company is eligible for the Employment Allowance (£10,500), you could pay a slightly higher salary without triggering employer NI.
Strategies for Extracting More Than £50k
As you move above the £50k mark, the efficiency of dividends starts to drop sharply.
Higher rate dividend tax kicks in at 33.75%, and additional rate tax climbs to 39.35% once you cross £125,140 in total income.
Salaries at this level also start triggering 40% Income Tax and 8% Employee NI—plus 15% Employer NI for the company.
Why caution is needed:
- Increased tax on dividends and salary means your marginal tax rate can exceed 50%
- Corporation Tax remains at up to 25%, reducing funds available for dividends
- The frozen personal allowance means more income is pulled into higher tax bands
Strategies to manage this:
- Pension Contributions
Divert excess profits into pension schemes. Contributions are Corporation Tax deductible and grow tax free. - Involve a Spouse or Partner
Share ownership (e.g. alphabet shares) can split dividends across two people, doubling allowances and keeping income within lower tax bands. - Consider R&D Claims
If you claim R&D relief, higher salaries might be worthwhile, as these costs qualify for enhanced deductions. Dividends don’t. - Use Director’s Loan Accounts Cautiously
If you need access to more funds in the short term, you could borrow from the company. Be aware of S455 tax charges if unpaid within 9 months, though these can be refunded.
Plan:
- Keep your salary at £12,570 (or higher if claiming R&D relief or Employment Allowance)
- Take dividends only up to your personal higher rate limit, then consider pensions or spouse shareholding
- Use director’s loans only for temporary needs and with a clear repayment plan
Summary
The salary versus dividends question in 2025/26 requires more than just rule of thumb advice.
It demands a tailored approach based on your income level, company profits, personal situation and future plans.
For clear, tailored guidance, get in touch with us at Tax Expert and make your 2025/26 remuneration strategy work harder for you.
Fill out our form here for any questions, email us at info@taxexpert.co.uk, or message us on our WhatsApp for out of office hours.
Kind regards,
Ilyas Patel