Most tax-efficient director's salary and dividends for 2025/26

Running your own limited company gives you control, but it brings a whole new set of decisions, especially when it comes to paying yourself as a director. With tax rules changing every year, how you take money out of your company in 2025/26 could make a noticeable impact on your take-home pay.

The good news? You’re not limited to one method. As a limited company directors, you can draw a salary, take dividends, make pension contributions, and even use various allowances or perks. Each option offers different tax benefits, but the real saving comes from combining them smartly.

The standard approach for the optimal director’s salary and dividend structure is to take a low director’s salary and then take money regularly in the form of dividends. This tends to be the most tax-savvy method. But here’s the catch, tax thresholds, rates and allowances changes usually changes in April. It’s smart to review your pay structure annually to make sure you’re still pay yourself in the most tax-efficient way.

In this guide, we’ll explore the most tax efficient way to pay yourself as a director for 2025/26 tax year, which runs from 6 April 2025 until 5 April 2026. By the end, you’ll have a clear strategy to structure your salary-dividend pay in 2025/26 in order to maximise your income while staying fully compliant with HMRC regulations.

As a director, your salary is liable for standard Income Tax and Class 1 National Insurance contributions. Dividends, on the other hand, are taxed at lower rates based on your Income Tax band, and you don’t pay any National Insurance on those.

So, for the 2025-26 tax year, let’s get into what you’ll actually owe when you draw a director’s salary and take dividends from your company.

Salary vs. Dividends

Salary: 

Your salary is simply a fixed payment your company issues to you, usually on a monthly basis. It’s your standard remuneration, just like any employee, and it’s subject to both Income Tax and National Insurance.

Income Tax Rates and Thresholds for 2025/26

For the 2025 tax year, you get a personal allowance of £12,570, meaning you pay no income tax on the first £12,570 you earn. However, if your total earnings exceed £100,000 for the 2025/26 tax year, the allowance decreases, £1 for every £2 above the threshold.

Above the personal allowance, the following Income Tax rates apply to your director’s salary:

National Insurance Rates and Thresholds for 2025/26

For the 2025-26 tax year, National Insurance rates and thresholds remains the same across the UK.

• Class 1 employee National Insurance rate is 8%, which means you will pay 8% Class 1 NICs on your director's salary between £12,570 and £50,270.
• Any earnings above this range will be subject to a 2% rate.
• Additionally, your company will pay 15% Class 1 employer's NICs on your salary income exceeding £5,000.

Dividends: 

If your company is profitable, you can pay yourself dividends from after-tax profits. Remember: dividends come after the company’s paid Corporation Tax, and you can’t deduct them as limited company expenses. For 2025/26, you get a £500 tax-free dividend allowance. After that, dividend income is taxed at rates based on your total income.

Dividend Tax Rates for 2025/26

Dividends are taxed differently from salaries. For 2025/26, you get a £500 tax-free dividend allowance. After that, dividend income is taxed at rates based on your total income.

Dividends are not subject to NICs, making them a tax-efficient way to extract profits from your company.

Other Income Sources

Benefits in Kind

Benefits in kind, also known as fringe benefits or perks, are non-cash benefits provided by your company. These can include things like company cars, health insurance, and other perks. These are non-cash benefits but still taxable. Most of them show up on your P11D form, and you may owe both tax and National Insurance Contributions on their value.

Pension Contributions

Pension contributions can be a highly tax-efficient way to save for retirement while reducing your taxable income. Contributions made by your company to your pension scheme count as allowable business expenses, so they reduce your company’s taxable profit and, in turn, its Corporation Tax liability. Plus, you personally won’t pay tax or NICs on these contributions.

The Most Tax Efficient Director's Salary in 2025/26

After the recent Employer’s NI updates, we advise to set directors’ salaries at £12,570 per annum, primarily to maintain National Insurance records and optimise tax relief, provided, of course, there’s no other personal income outside the company.

Your ideal salary depends on whether you are the sole director or have other employees on the payroll. Here are the three most tax-efficient director's salary options for 2025/26.

1. If you are a sole director with no other employees

If you are the sole director in your company, you have three choices for your salary.

1. The NIC Secondary Threshold of £5,000 per year
2. The NIC Lower Earnings Limit of £6,500 for the year
3. The NIC Primary Threshold and standard Personal Allowance of £12,570 per year

If you’re not planning to take your entire personal income strictly as salary and are open to a mix of salary and dividends, We would suggest considering one of the below options:

Option 1. Up to the Secondary Threshold - £5,000 annual salary

The Secondary Threshold is basically the cutoff where an employer needs to start paying employer NICs (National Insurance Contributions) on wages of the directors and employees.

For the 2025-26 tax year, the secondary Threshold is £5,000, that’s £417 a month, or £96 a week. So if your annual salary is £5,000 or less, you’re in the clear.

If you’re a director and you pay yourself up to this limit via PAYE, you avoid Income Tax, employee NICs, and employer NICs on your salary. It’s a tax-efficient move.

Additionally, you don't need to register as an employer or run PAYE, as long as nobody else in your company is earning £96+ a week, getting company perks or expenses, drawing a pension, working another job, or receiving things like Jobseeker’s Allowance.

The drawback? You won’t earn a qualifying year for your state pension, and Corporation Tax relief is lower than before.

Option 2. At least the Lower Earnings Limit -£6,500 annual salary

In 2025/26, directors should aim to take at least £6,500 a year (£125 a week or £542 a month) to protect your entitlement to the State Pension and benefits. This amount matches the National Insurance Lower Earnings Limit (LEL).

At this level of pay:

• You won’t pay any Income Tax.
• You won’t pay employee Class 1 National Insurance either, but you’ll still get the benefits of paying.
• If you pay yourself less than the LEL, you won’t collect NIC credits unless you make voluntary contributions.

For your salaries between £5,000 and £6,500, the company will need to pay 15% employer National Insurance on the amount that falls in this band.

2. If you have 2 or more paid employees, including directors

Option 3. Up to the Primary Threshold - £12,570 annual salary (GoForma’s recommendation)

If your company qualifies for the Employment Allowance, it can often be more tax-efficient to pay yourself a director’s salary up to the National Insurance Primary Threshold (PT) of £12,570 per year (£1,048 a month or £242 a week).

The primary threshold is the level at which directors and employees begin paying Class 1 National Insurance. At present, it matches the standard Personal Allowance, meaning you won’t owe any Income Tax on this salary either.

Normally, your company would have to pay 15% employer NICs on the part of your salary between £5,000 and £12,570. However, with the Employment Allowance, you can cut down the company’s annual National Insurance bill by as much as £10,500.

Note that Your company isn’t eligible to claim employment allowance if:

• You are the only director and have no other employees.
• The only person paid above the Secondary Threshold is a director.
• No one in the company is paid above the Secondary Threshold.

There are further conditions to meet, so it’s best to check HMRC’s guidance to see if your company qualifies for the Employment Allowance.

Given this, we recommend to set each director’s salary at the tax-free personal allowance of £12,570 per annum. This structure is streamlined, compliant, and typically delivers optimal tax efficiency.

Most Tax-Efficient Director's Dividends in 2025/26

To determine the dividends, you must first deduct Corporation Tax from your business profits. The good news is, HMRC recognises that the company’s already paid tax, so dividend tax rates for individuals are set lower than regular income tax rates.

How much you can take out in dividends depends on a few key factors:

• The distributable profit of your company after Corporation Tax.
• Your shareholding percentage in the company.
• And, of course, how you structure your income to avoid entering into higher tax brackets.

Once your total income, including both salary and dividends, goes above the Personal Allowance (£12,570) and the dividend allowance (£500), any additional dividends are taxed according to your Income Tax band. One advantage here: you won’t pay National Insurance on dividend income.

Looking at the 2025/26 tax year, if dividends are your only income, you can receive up to £13,070 tax-free. Anything above that gets taxed at the relevant dividend rates. Remember, dividend rates are lower than standard income tax, because the company’s already paid between 19% and 25% Corporation Tax before distributing dividends. This two-step process helps reduce your overall tax burden compared to taking all your income as salary.

A smart mix of director’s salary and dividends can significantly reduce your tax liability, which is especially beneficial if you’re near the higher tax thresholds. The right balance can lead to substantial savings.

Let's have a look at some remuneration scenarios using a tax-efficient combination of a director's salary and dividends. We will then compare these with taking all company profits as a salary. This comparison will help you understand the total amount of Corporation Tax and personal tax you may need to pay.

Scenario 1: Company with Annual Taxable Profits of £70,000 - Salary and Dividends Combination

Suppose your company has taxable profits of £70,000 after deducting running costs and expenses (before accounting for your salary).

• Director’s Salary: £12,570 (maximum savings)
• Net Profit for Dividends: £45,962 (after deducting Corporation Tax and director's salary)

Company Tax Breakdown:

• Profit before tax: £70,000
• Director’s salary: £12,570
• Taxable profit: £57,430
• Corporation Tax @19.97%: £11,468

Personal Tax Breakdown:

• Director’s salary: £12,570
• Pension contribution: £7,160
• Class 1 employee NIC: £0.00
• Income Tax: £0.00
• Gross dividend income: £41,170
• Tax on dividends: £3,298.75

Summary:

• Gross pay: £50,270
• Take-home pay (net pay): £46,971.25
• Reserves left in the company: nil

Total Tax Liability:

• Corporation Tax: £11,478
• Personal tax on dividends: £3,298.75
• Total tax liability: £14,746.75

Scenario 2: Taking Full Salary and no dividends

If you take the full £70,000 as a director's salary:

• Director’s Salary: £70,000
• Taxable profit: £0 (entire salary as a deductible expense)

Personal Tax Breakdown:

• Personal Allowance: 0% on the first £12,570 = £0.00
• Income Tax @ 20% on £37,700 = £7,540
• Income Tax @ 40% on the remaining £19,730 = £7,892
• Class 1 employee NIC (@ 8% between £12,570 and £50,270, then 2% on the remaining salary) = £3,410.60
• Employer's NIC: £8,434.20

Summary:

• Take-home pay (net pay): £52,157.40

Total Tax Liability:

• Personal tax: £15,432.60
• Employer’s NIC: £8,434.20
• Total tax liability: £23,866.80

Comparison

By combining salary and dividends, the total tax liability is £14,746.75, whereas taking the full salary results in a total tax liability of £23,866.80. The combination method saves £8,223.30 in taxes.

Assumptions considered in the above calculations:

1. You're a UK resident
2. You're not caught by IR35
3. Your only income is salary and dividends. 
4. You have no outstanding student loans. 
5. You have sufficient post corporation tax profits to pay yourself dividends.

When it comes to paying yourself as a director, the most tax-efficient way to pay yourself as a director in the 2025/26 tax year is to take a low salary of £5,000, £6,500, or £12,570, combined with dividends.

Classic strategy, right? But here’s the thing: there’s no one-size-fits-all answer. Your personal situation, your future plans, and your company’s profits all come into play. Copying another director’s approach without considering your own numbers can lead to overpaying tax, and that’s just bad business.

Planning ahead matters a lot. Review your salary, dividends, pension contributions, and overall remuneration strategy before the tax year starts. It’s smarter to be proactive than reactive when it comes to your financial planning.

If you want to make the most of your company’s profits in 2025/26, now’s the time to get expert advice. GoForma’s limited company accountants can collaborate with you to create a pay strategy that fits your business, minimises your tax bill, and maximises your take-home pay.

Book a free consultation with our accountant today and get the support you need to pay yourself smart way.

FAQs on the most Tax Efficient Director's Salary and Dividend

What is the best salary for a director in 2025/26?

The optimum directors salary 2025/26 is £12,570 per annum, which equates to £1,047 per month or £241 per week. At this level, you won’t pay Income Tax, you keep your state pension record, and your company can treat the salary as an expense to reduce Corporation Tax.

How much dividend can I pay myself tax-free?

You can receive up to £500 in dividends tax-free during the 2025/26 UK tax year. Any dividends above that are taxed.

Can directors pay into a pension through the company?

Yes, directors can pay into a pension through their company. These contributions are a tax-deductible business expense and help reduce Corporation Tax.

Is it better to pay dividends or salary as a director?

Dividends are usually more tax efficient than salary because they aren’t subject to National Insurance and are taxed at lower rates. However, a small salary is still useful to keep your state pension record and reduce Corporation Tax, so most directors use a mix of both.

How much can I pay myself tax-free?

In 2025/26, you can take up to £12,570 tax-free through your personal allowance. On top of this, the first £500 of dividends is also tax-free. If you combine both, you can draw £13,070 without paying any Income Tax.

How and when do I pay tax on dividends?

You pay tax on dividends through your Self Assessment tax return. Tax is due by 31 January following the end of the tax year. For example, dividends taken in 2025/26 need to be reported, and any tax owed must be paid by 31 January 2027.