The Most Tax-Efficient Director’s Salary and Dividends for 2025/26
This guide breaks down the best way to pay yourself tax-efficiently in 2025/26.
If you’re a director and shareholder of a small limited company, you’re probably wondering what the most tax-efficient way to pay yourself is for the 2025/26 tax year. I wrote the blog last year about this and its time for an update for the upcoming year.
With the Chancellor’s Autumn Budget changes locked in specially about Class 1 National Insurance, let’s break down the best salary and dividends combination to maximise your take-home pay while minimising tax liabilities.
Tax Rates and Allowances for 2025/26
From 6 April 2025, the following tax rates apply in England, Wales, and Northern Ireland:
✅ Personal Allowance remains at £12,570 (unchanged until April 2028).
✅ Dividend Allowance remains at £500 (meaning only the first £500 of dividends are tax-free).
✅ Basic Rate Band remains at £50,270.
✅ Additional Rate Threshold remains at £125,140.
These thresholds mean careful planning is essential to ensure you’re paying yourself in the most efficient way possible.
Why Salary + Dividends Still Works Best
For most limited company directors, taking a small salary and topping up with dividends remains the most tax-efficient method. Why?
- Salaries are tax-deductible for the company, reducing corporation tax.
- No National Insurance (NI) on dividends, making them more attractive than salary.
- Dividends can be timed to manage tax liabilities.
- A minimum salary counts towards your State Pension eligibility.
Now, let’s look at two tax-efficient strategies depending on whether you can claim the Employment Allowance.
Option 1: If You CAN’T Claim the NI Employment Allowance
This applies to most single-director companies with no employees.
📌 Recommended salary: £12,570 per year (to maximise tax relief).
📌 Dividends: £37,700 to stay within the basic rate band.
📌 Personal tax liability: £3,255.
Breakdown:
- £7,570 of dividends are covered by the remaining personal allowance after salary.
- £500 of dividends are tax-free under the Dividend Allowance.
- The remaining £37,200 is taxed at 8.75% (£3,255).
This method gives you the best overall tax savings, as salaries reduce corporation tax, even though you’ll need to pay a small amount of Employer’s NI. If you want to avoid the admin of running Employer NI, you can take a salary of £5,000 instead and keep dividends at £45,270, but this would cost you around £520 more in tax overall.
💡 Important: You need to pay yourself at least £542 per month to qualify for the State Pension. If you take a £416 salary, then there is no Employer NI but it will also not count towards your state pension
Option 2: If You CAN Claim the NI Employment Allowance
If your company employs at least one other person (spouse, family member, or employee), you can claim the £10,500 NI Employment Allowance.
📌 Recommended take home salary: £12,570 per year (maximising tax relief).
📌 Dividends: £37,700 to stay within the basic rate band.
📌 Personal tax liability: £3,255 (same as Option 1).
Why?
- Since you can claim the NI Employment Allowance, you avoid Employer’s NI on the salary.
- Your salary remains a corporation tax-deductible expense.
- Your dividends remain taxed at 8.75% up to the basic rate limit.
Result: The same personal tax liability as Option 1, but because salaries are deductible from company profits, this reduces corporation tax further, making it the better choice if you can claim the allowance.
Other Ways to Extract Profits Efficiently
If you want to go beyond just salary and dividends, consider these strategies:
✅ Pension Contributions: Your company can contribute to your pension tax-free up to £60k, reducing corporation tax.
✅ Timing Dividends Smartly: Spread dividend payments over tax years to avoid tipping into higher tax bands.
✅ Employing family members: Employ family members for your business doing admin work specially if they are not working anywhere
Final Thoughts
For most directors, a combination of salary and dividends remains the best way to pay yourself. If you’re the only employee, a £12,570 salary is still optimal—but be prepared for some Employer’s NI admin. If you can claim the NI Employment Allowance, definitely take advantage of it, as it saves your company even more tax.
💡 Next Steps: If you want a tailored plan for your business or need help optimising your tax strategy, let’s chat. Book a call today, and let’s make sure you’re paying the least tax possible! 🚀
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