What's the most tax-efficient salary for a company director in 2025/26?

For most director-shareholders, £12,570 (the personal allowance) is the default recommendation. It's tax-free personally, builds state pension entitlement, and is a corporation tax deduction for the company. Sole director-employees who can't claim Employment Allowance sometimes go lower, to £5,000 or £6,500, to avoid employer NIC.

Why not just take a big salary?

Because salary above the personal allowance is taxed at 20%, 40%, or 45% income tax, plus 8% or 2% employee NIC and 15% employer NIC. Dividends carry no NIC and lower rates (8.75% and 33.75%), so they're almost always cheaper for extracting profit above the personal allowance.

How much dividend tax will I pay in 2025/26?

£500 tax-free through the dividend allowance, then 8.75% on dividends inside the basic rate band, 33.75% inside the higher rate band, and 39.35% above £125,140. Dividend tax sits on top of income tax on salary, and the bands use total taxable income.

Are pension contributions from my company more tax-efficient than dividends?

Often yes. Employer pension contributions are deductible for corporation tax, don't count as personal income, and don't attract NIC. For directors already at higher-rate tax, moving £10,000 of extraction into a pension typically saves £3,000 or more in personal tax versus taking it as dividends.

Should I take the same salary every year?

No. The most tax-efficient split changes each tax year as thresholds, rates, and your total income change. Run a projection at the start of every tax year (or ask your accountant to). For most director-shareholders, a proper annual review saves £1,500 to £6,000 versus the 'same as last year' default.

Salary vs dividends: the most tax-efficient split for company directors (2025/26)

If you own and run a UK limited company, you get to choose how you pay yourself. Get the split between salary and dividends right and you can save several thousand pounds a year in tax. Get it wrong and you pay more than you need to, sometimes without realising.

Here's the maths for 2025/26.

The short answer

For most director-shareholders with no other income:

Salary: £12,570 (the personal allowance).
Dividends: everything else you need to extract, up to your personal thresholds.

That combination gets you the lowest total tax on money coming out of the company, in almost every scenario under £100,000 of extraction.

Why salary at £12,570 specifically

Three things happen at exactly £12,570:

No income tax. It's the personal allowance, so the salary is tax-free personally.
National Insurance limbo. You're above the Lower Earnings Limit (£6,500), so you build up qualifying years for the state pension. You're at or near the Secondary Threshold (£5,000 in 2025/26) for employer NIC, meaning some employer NIC is due but usually covered by Employment Allowance if you have more than one employee.
Corporation tax saving. The salary is a deductible expense, so the company saves 19-25% corporation tax on every pound of salary paid.

If you're the sole director-employee of your company, you can't claim Employment Allowance, so a salary above the £5,000 Secondary Threshold triggers 15% employer NIC. In that case, some advisers recommend a salary of £5,000 or £6,500 (the Lower Earnings Limit) instead. The saving vs £12,570 is small either way. £12,570 is still the default recommendation for most director-shareholders.

The dividend rules for 2025/26

Dividends come out of post-corporation-tax profit. You pay:

£500 tax-free each year (the dividend allowance).
8.75% on dividends inside the basic rate band (up to £50,270 total income).
33.75% on dividends inside the higher rate band (£50,270 to £125,140).
39.35% on dividends above £125,140.

Dividend tax is on top of income tax on your salary, and the bands are based on total taxable income.

Worked example: £30,000 total extraction

£12,570 salary + £17,430 dividends

Salary: £12,570, no personal tax.
Dividends: £500 tax-free, £16,930 taxed at 8.75% = £1,481.
Total personal tax: £1,481.
Corporation tax saved on salary (at 19%): ~£2,388.

Worked example: £50,000 total extraction

£12,570 salary + £37,430 dividends

Salary: £12,570, no personal tax.
Dividends: £500 tax-free, £36,930 taxed at 8.75% = £3,231.
Total personal tax: £3,231.

You're still comfortably inside the basic rate band, so 8.75% applies to all the dividends.

Worked example: £100,000 total extraction

£12,570 salary + £87,430 dividends

Salary: £12,570, no personal tax.
Dividends up to £50,270: £37,200 taxed at 8.75% (after £500 allowance) = £3,220.
Dividends above £50,270: £49,730 taxed at 33.75% = £16,784.
Total personal tax: £20,004.

At this level, you should also consider pension contributions to keep taxable income below the £100,000 threshold where the personal allowance starts to taper.

When to break the default rule

Situations where a higher salary makes sense:

You want maximum pension contribution room. Pension contributions are capped at 100% of relevant earnings (salary counts, dividends don't). Higher salary = higher pension room.
You need mortgageable income. Lenders often prefer salary over dividends, especially for higher-income multiples.
You've used Employment Allowance already. If you have staff and claim Employment Allowance, employer NIC on a £12,570 salary is fully covered, so there's no cost drag.
The company has surplus profit and low corporation tax rate. Salary is a corporation tax deduction; at 25% marginal corporation tax, salary saves more.

Situations where a lower salary makes sense:

You're a sole director-employee and can't claim Employment Allowance. A salary of £5,000-£6,500 avoids employer NIC entirely, while still building state pension years.
You have other significant income (rental, employment, dividends from elsewhere). If your personal allowance is already used, salary just adds tax.

Other levers to consider

Pension contributions from the company are deductible for corporation tax, don't count as personal income, and don't attract NIC. Often the most tax-efficient extraction of all.
Director's loan account: if you loaned the company money at incorporation, you can extract it back tax-free.
Trivial benefits: up to £300 a year in small gifts to yourself and family, tax-free (max £50 per gift).
Rent charged to the company if you use part of your home as an office. Adds to personal income but avoids NIC.

What we'd actually do for a client

Every year we run a personal tax projection for director-shareholder clients, model salary + dividends + pension in combination, and issue a recommended split before the tax year starts. It usually saves £1,500 to £6,000 a year vs the "same as last year" default.

If you'd like us to do that for you, get in touch or read about our services.