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

PHS Team

15 Apr, 2025

As a director of a limited company, it's crucial to understand how to pay yourself in the most tax-efficient way during the 2025/26 tax year. 

This involves balancing your director's salary and dividends to minimise tax liabilities and maximise take-home pay. One key element to consider is the dividends allowance. This guide will explain the optimal strategies in simple terms.

Understanding Salary and Dividends

As a director of a limited company, understanding how to reward yourself through salary and dividends is essential for effective tax planning. Both methods have distinct tax implications and contribute differently to your overall compensation.

• Salary: A salary is a fixed, regular payment made by your company, similar to the wages of an employee. It is typically subject to Income Tax and National Insurance Contributions (NICs). 

The most tax-efficient salary UK often falls around the National Insurance threshold to minimise NICs, while still being eligible for state benefits like pension credits

• Dividends: Dividends are payments made to shareholders from a company's after-tax profits.

Salaries are subject to Income Tax and National Insurance Contributions (NICs), while dividends are taxed differently and are not subject to NICs. 

Optimal Director's Salary for 2025/26

For the 2025/26 tax year, the most tax efficient salary UK for directors is £12,570 per annum, which also happens to be the director's salary 2024/25 benchmark. This amount matches the personal allowance, meaning you won’t pay Income Tax on this director's salary.

National Insurance Considerations:

• Employee's NIC: This Starts when salary exceeds the Primary Threshold.
• Employer's NIC: Starts when the salary exceeds the Secondary Threshold.

By setting your salary at £12,570, you stay below these thresholds, avoiding NICs. 

Dividend Strategy for 2025/26

To effectively manage your income as a director in the 2025/26 tax year, it's essential to understand how dividends are taxed and how to structure your income in the most tax efficient way to pay yourself as a director.

Dividend Tax-Free Allowance

The first £500 of dividend income you receive is tax-free, known as the 

Dividend Tax Rates

Dividends exceeding the £500 allowance are taxed at the following rates:

• Basic Rate: 8.75%
• Higher Rate: 33.75%
• Additional Rate: 39.35%

Income Tax Bands for 2025/26

To determine how much dividend income falls into each tax band, consider the following thresholds:

• Personal Allowance: Up to £12,570 – 0% tax
• Basic Rate Band: £12,571 to £50,270 – 20% tax
• Higher Rate Band: £50,271 to £125,140 – 40% tax
• Additional Rate Band: Above £125,140 – 45% tax

To stay within the basic rate threshold, your total income (salary + dividends) should not exceed £50,270. This means you can take up to £37,700 in dividends after your £12,570 salary. 

Example:

Consider the following income structure:

• Total Income: £50,270
  • Salary: £12,570
  • Dividends: £37,700

Tax Calculation Breakdown

1. Salary (£12,570):
   • Income Tax: £0 (covered by personal allowance)
   • National Insurance Contributions (NICs): None, as salary is within the NICs threshold
      
2. Dividends (£37,700):
    
   • Dividend Allowance: £500 tax-free
   • Taxable Dividends: £37,200
   • Dividend Tax:
     • Basic Rate (8.75%): £3,255

Other Considerations

• Employer's NIC: If your company is eligible for the Employment Allowance, it can cover up to £5,000 of the employer's NIC. 
• Pension Contributions: Making pension contributions can be a tax-efficient way to extract profits.
• Student Loans: Higher income may affect student loan repayments.
• Child Benefit: Earnings over £50,000 may impact child benefit entitlements.

Common Mistakes to Avoid

• Taking dividends that push you into a higher tax bracket.
• Not accounting for National Insurance thresholds.
• Failing to properly document dividend payments.

Balancing your director's salary and dividends is key to tax efficiency. For 2025/26, a salary of £12,570 combined with dividends up to £37,700 allows you to maximise your take-home pay while minimising tax liabilities. 

As a company director, paying yourself through a mix of director's salary and dividends is often the most tax efficient way to pay yourself as a director. For the director's salary 2024/25, many choose £12,570—the most tax efficient salary UK—to stay within the personal allowance and avoid income tax. To support this, you need evidence like payslips, RTI submissions, and board meeting minutes.