Director Salary vs Dividends — Optimal Pay 2025-26
Most UK company directors take a small salary up to the personal allowance (£12,570) and draw the rest as dividends. This avoids employee NI and reduces the overall tax burden compared to taking all profit as salary.
Most directors take £12,570 salary + dividends — saving thousands vs all-salary
A salary of £12,570 sits exactly at the personal allowance — meaning zero income tax on the salary. Because the primary NI threshold also sits at £12,570, there is zero employee NI too. Employer NI applies on the salary above £5,000 (secondary threshold), but this is a company cost that reduces the corporation tax bill. The remaining profit is then distributed as dividends at the much lower dividend tax rates (8.75% basic, 33.75% higher) rather than income tax (20%/40%).
What changed in 2025-26?
The employer NI secondary threshold dropped from £9,100 to £5,000 and the rate rose from 13.8% to 15%. This means that even a £12,570 director salary now attracts employer NI of approximately £1,136/year — a new cost in 2025-26. However, the salary + dividends strategy still significantly outperforms the all-salary approach at most profit levels.
How each strategy works
The company pays you the entire profit as salary. The salary is deductible against corporation tax, but you pay full income tax (20%/40%/45%) and employee NI (8%/2%) on the entire amount. The company also pays employer NI at 15% above £5,000 — so the gross cost to the company exceeds the salary you receive.
The company pays you £12,570 salary (personal allowance). Zero income tax, zero employee NI. Employer NI ~£1,136 applies but is deductible. The remaining profit — after corporation tax at 19% or 25% — is paid as dividends. First £500 is tax-free; above that, 8.75% (basic) or 33.75% (higher rate).
- Corporation Tax: 19% (≤£50k profit) / 25% (>£250k)
- Employer NI: 15% above £5,000
- Dividend Tax: 8.75% basic / 33.75% higher
- Income Tax: 20% basic / 40% higher / 45% additional
- Dividend Allowance: £500
All-salary vs salary + dividends — all profit levels 2025-26
| Company profit | All salary net | Salary + dividends net | Annual saving | |
|---|---|---|---|---|
| £30,000 | £22,771 | £24,657 | £1,886 | View → |
| £40,000 | £29,033 | £32,048 | £3,015 | View → |
| £50,000 | £35,293 | £39,439 | £4,146 | View → |
| £60,000 | £41,197 | £46,831 | £5,634 | View → |
| £70,000 | £46,240 | £50,134 | £3,894 | View → |
| £80,000 | £51,283 | £55,103 | £3,820 | View → |
| £90,000 | £56,327 | £60,072 | £3,745 | View → |
| £100,000 | £61,370 | £65,041 | £3,671 | View → |
| £120,000 | £70,457 | £74,978 | £4,521 | View → |
| £150,000 | £80,634 | £89,884 | £9,250 | View → |
| £200,000 | £103,677 | £113,236 | £9,559 | View → |
Strategy B assumes: £12,570 salary, 19%/25% corporation tax, £500 dividend allowance, 8.75%/33.75%/39.35% dividend tax. Estimates only — consult an accountant for your situation.
Up to £80,000 profit
£90,000 profit and above
Director pay strategy in 2025-26
For most company directors, the optimal pay strategy combines a salary at or near the personal allowance (£12,570) with the balance drawn as dividends. This approach avoids income tax on the salary entirely, and the lower dividend tax rates (8.75% basic, 33.75% higher) are far below the equivalent income tax rates (20% and 40%).
The 2025-26 tax year brought a notable change: the employer NI secondary threshold fell from £9,100 to £5,000 and the rate increased from 13.8% to 15%. A director on £12,570 salary now pays approximately £1,136 in employer NI (a company cost, not a personal deduction). Despite this, the salary + dividends strategy still meaningfully outperforms the all-salary approach — at £50,000 profit, the saving is £4,146; at £100,000 profit, the saving reaches £3,671.
Important: These calculations are estimates and assume all company profit is extracted in the same tax year. In practice, directors may retain profits in the company, time dividend payments across tax years, make pension contributions, or use other tax-efficient methods. See the IR35 calculator if you contract through your company. Always consult a qualified accountant before deciding your director pay strategy.