If you run a limited company, how you pay yourself makes a huge difference to your tax bill. Here's the optimal strategy for 2025/26.
The Optimal Salary: £12,570
The most tax-efficient salary for a company director in 2025/26 is £12,570 — exactly the personal allowance. At this level, you pay zero income tax on your salary, you preserve your full personal allowance, you build National Insurance qualifying years for your state pension, and your company gets a corporation tax deduction.
Tax on a £12,570 salary
Income tax: £0
Employee NI: £0
Employer NI: 15% on earnings above £5,000 = £1,136
Total tax cost: £1,136 (all employer NI, deductible against corporation tax)
Then Take Dividends
After paying yourself a salary, extract remaining profits as dividends. Dividends are taxed at lower rates than salary because the company has already paid corporation tax (25%) on the profits.
| Band | Dividend Tax Rate |
|---|---|
| First £500 (dividend allowance) | 0% |
| Basic rate (up to £50,270 total income) | 8.75% |
| Higher rate (£50,271-£125,140) | 33.75% |
| Additional rate (over £125,140) | 39.35% |
Full Example: £80,000 Company Profit
Salary: £12,570 (no income tax, no employee NI)
Corporation tax on remaining £67,430: £16,858 (25%)
Available for dividends: £50,573
Dividend tax (basic rate portion): £3,341
Dividend tax (higher rate portion): £4,046
Total take home: approximately £55,760
Compare this to taking the full £80,000 as salary where you'd take home about £56,200 but pay much more in employer NI. The difference grows significantly at higher profit levels.
Optimising Your Director Pay Mix
The most tax-efficient strategy for limited company directors in 2025/26 is typically to pay yourself a salary of £12,570 (the personal allowance) and take the remainder as dividends. At this salary level, you pay zero income tax and minimal NI. Dividends up to £500 fall within the tax-free dividend allowance. Above that, dividends are taxed at 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate) — all significantly lower than the equivalent income tax rates on salary.
However, salary has benefits that dividends do not. It counts toward your State Pension qualifying years (you need the Primary Threshold of £12,570 for this), it builds up your NI record, and it is a deductible expense for Corporation Tax. Some directors choose a salary just above the Primary Threshold to maximise pension entitlement while keeping the tax bill low. If your company profits are substantial, consider making employer pension contributions instead of taking higher dividends — these are free of both employer NI and Corporation Tax. Use our dividend tax calculator for your specific situation.
Calculate your optimal salary/dividend split
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