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

As a company director, understanding the most tax efficient way to pay yourself as a director is important. This involves making strategic decisions about your income, balancing your salary and dividends, and taking advantage of various tax reliefs and allowances. By doing so, you can maximise your take-home pay while minimising your tax liabilities.

Tax efficiency is not just about paying less tax; it’s about paying the right amount. For directors, being tax-efficient means keeping more of your earnings while complying with HMRC regulations. Efficient tax planning can lead to significant savings, allowing you to reinvest more money back into your business or personal ventures.

Directors often have more flexibility than employees in choosing how to structure their income. This flexibility provides opportunities to optimise tax efficiency through various strategies, such as drawing a combination of salary and dividends, making pension contributions, and claiming business expenses.

This guide aims to simplify complex tax concepts, providing clear, actionable advice that you can implement. By the end of this article, you should have a solid understanding of how to structure your income as a director in 2025/26 to optimise tax savings and enhance your financial well-being.

As a director, you have several options for paying yourself. Understanding these options and their tax implications is crucial for maximising your take-home pay.

Salary vs. Dividends

Salary: 

Your salary is a fixed amount of money paid to you by your company at regular intervals, typically monthly. It’s a straightforward form of compensation that works much like the wages paid to regular employees. Salaries are subject to income tax and National Insurance contributions (NICs).

Income Tax Rates and Thresholds for 2025-26

The yearly tax-free personal allowance in 2025 is £12,570. This means the first £12,570 of your personal income is tax exempt. However, if your earnings exceed £100,000 for the 2025/26 tax year, your personal allowance decreases by £1 for every £2 earned over that 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, the 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 13.8% Class 1 employer's NICs on your salary income exceeding £5,000.

Dividends: 

Dividends are payments made to shareholders out of a company's profits. As a director, you can pay yourself dividends if your company is profitable. Unlike salaries, dividends are not considered business expenses and are paid out of after-tax profits. This means that your company must pay Corporation Tax on its profits before distributing dividends.

Dividend Tax Rates for 2025-26

Dividends are taxed differently from salaries. You receive a £500 dividend allowance for the 2025/26 year, which is tax-free. Beyond this allowance, dividend income is taxed at different rates depending on your total taxable 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. Benefits in kind are subject to income tax and, in some cases, NICs. The value of these benefits must be reported on your P11D form and included in your total taxable income.

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 into your pension scheme are considered an allowable company expense, reducing your company's taxable profits and its Corporation Tax bill. You, as an individual, do not pay tax on these contributions, and they are not subject to NICs.

Following the changes to Employers NI, we would recommend an increase in directors' salaries to £12,570 per annum to maintain NI records and maximise tax relief (assuming no other sources of income outside of 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.

Option 1. £5,000 annual salary (£416.66 per month) – less admin

This salary aims to avoid any arising tax/NI charges. However, you do not obtain a qualifying year towards your state pension, and your Corporation Tax relief is reduced compared to prior years.

Option 2. £6,500 annual salary (£541.66 per month) – somewhere in the middle

This salary aims to maintain your NI record by meeting the Lower Earnings Limit. Your company will incur a small Employers National Insurance liability (£225), and your Corporation Tax relief will be less than in prior years.

Option 3. £12,570 annual salary (£1,047.50 per month) – maximum savings (GoForma’s recommendation)

This salary maximises your tax-free personal allowance. Your company will incur a higher Employers National Insurance liability (£1,135.50), but this will be offset even more so by the higher Corporation Tax relief. This is the most tax efficient option.

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

If your company has two or more directors or employees receiving salaries, deciding on your director’s salary level is easier.

A company with two or more employees or directors receiving salaries above £5,000 are eligible to utilise an allowance called ‘Employers Allowance’. This is where the first £10,500 of Employers NI is not payable.

With this in mind, our recommendation would be for each director to be paid a salary in line with the tax-free personal allowance of £12,570 per annum.

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To determine the dividends, you must first deduct Corporation Tax from your business profits. HMRC sets lower personal tax rates on dividends to account for the tax already paid by the company.

The amount you can receive as dividends depends on:

• The distributable profit of your company after Corporation Tax.
• Your shareholding percentage in the company.
• Your strategy to avoid entering higher tax brackets.

When your total personal income, including salary and dividends, exceeds the Personal Allowance of £12,570 and the dividend allowance of £500, your dividends will be taxed according to your Income Tax band. Notably, no National Insurance is payable on dividend income.

For 2025-26, you can take up to £13,070 in dividends tax-free, provided you have no other income. Amounts above this will be taxed at the relevant dividend tax rates.

Dividend tax rates are lower than income tax rates because dividends are paid from post-tax company profits. Companies typically pay between 19% and 25% Corporation Tax on profits before distributing dividends. This dual taxation approach ensures a reduced overall tax burden compared to taking all income as salary.

By combining a director's salary with dividends, you can significantly lower your tax liability, especially if you fall into higher tax brackets. The optimal mix of salary and dividends 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

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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.

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Understanding how to structure your income as a director can lead to significant tax savings. Achieving tax efficiency requires careful planning and a good understanding of tax regulations. As a director, you have the flexibility to choose how you structure your income, allowing you to take advantage of various tax-saving opportunities. Regularly reviewing your income structure and staying informed about changes in tax laws will help you maintain tax efficiency over time.

While this guide provides a comprehensive overview of tax-efficient strategies, every individual's situation is unique. Consulting with a personal tax accountant can provide personalised advice tailored to your specific circumstances. They can help you understand the complexities of the tax system, identify additional tax-saving opportunities, and ensure compliance with UK tax regulations.

By following the strategies outlined in this guide and seeking professional advice, you can achieve the most tax-efficient way to pay yourself as a director, ensuring that you maximise your take-home pay while minimising your tax liabilities.

FAQs on the most Tax Efficient Salary and Dividend

1. How much dividend can I pay myself tax-free?

For the 2025/26 tax year, you can earn up to £500 in dividends tax-free.

2. What is the best way for directors to pay themselves?

The best way for directors to pay themselves is through a combination of salary and dividends. This approach is tax-efficient, reducing Income Tax and National Insurance contributions.