Salary vs Dividends for Company Directors in 2025-26: The Optimal Strategy After the NI Rise

For company directors who control their own limited company, the question of how to extract profit from the business — as salary, dividends, or a combination — is one of the most financially significant decisions they make each year. The answer changed materially in April 2025 when employer NICs rose from 13.8% to 15% and the secondary threshold fell from £9,100 to £5,000. What was optimal in 2024-25 needs to be recalculated.

The core principle: why salary plus dividends outperforms salary-only

A company director taking all income as salary pays income tax (20-45%) and employee NICs (8% or 2%) through PAYE, and the company pays employer NICs (15% from April 2025) on top. By contrast, taking profits as dividends means the company first pays corporation tax (19-25%), then the director pays dividend tax (8.75% basic, 33.75% higher) on the net — with no NICs at all on dividend income. In most scenarios, the combined tax rate through salary-plus-dividends is substantially lower than salary-only.

The 2024-25 optimal strategy (recap)

In 2024-25, the standard advice for a sole director was to pay a salary of £12,570 per year (equal to the personal allowance). At that level:

• No income tax (covered by personal allowance)
• No employee NICs (below the primary threshold)
• No employer NICs — because the £12,570 salary was above the £9,100 secondary threshold but below the secondary threshold by a different calculation... actually, at £12,570, employer NI was payable: (£12,570 − £9,100) × 13.8% = £479.

Many advisers therefore recommended taking salary at exactly £9,100 to avoid any employer NI, and topping up with dividends — saving the £479 employer NI cost at the expense of slightly less National Insurance credit toward the State Pension.

The 2025-26 optimal strategy — the NI change complicates things

From April 2025, the secondary threshold fell to £5,000. This means any salary above £5,000/year now triggers employer NI at 15%. The calculation for a sole director with no Employment Allowance:

• Salary at £9,100: Employer NI = (£9,100 − £5,000) × 15% = £615
• Salary at £12,570: Employer NI = (£12,570 − £5,000) × 15% = £1,136

However, the salary itself is a deductible expense for corporation tax. At the 19% small company rate, a £12,570 salary saves £2,388 in corporation tax. The net of employer NI (£1,136) minus CT saving (£2,388) means taking a salary of £12,570 still saves the company around £1,252 in net tax versus taking no salary at all. The personal allowance means the director pays no income tax on the salary.

The conclusion for 2025-26 for most single-director companies with profits below £50,000: the optimal salary is still approximately £12,570, capturing the personal allowance and the CT deduction, while paying employer NI only on the portion above £5,000.

Dividend allowance: now just £500

The dividend allowance has been progressively cut since 2022-23:

• 2022-23: £2,000
• 2023-24: £1,000
• 2024-25 onwards: £500

Dividend tax rates for 2025-26: 8.75% (basic rate band), 33.75% (higher rate band), 39.35% (additional rate). On profits above the salary and the dividend allowance, a basic-rate director paying 8.75% in dividend tax plus 19% corporation tax faces a combined rate of approximately 26.1% — significantly lower than the 48% effective rate (employee NI + income tax + employer NI) on equivalent salary in the higher rate band. See the calculation for dividends alongside salary.

Conclusion

The April 2025 employer NI changes increased the cost of paying directors through salary, but the arithmetic still generally favours taking salary up to the personal allowance and topping up with dividends. The specifics depend on profit level, whether you can claim the Employment Allowance, and your own income tax band. Use our director pay calculator to model your specific situation for 2025-26.