Salary vs Dividends: What Should You Take as a Company Director?
The salary vs dividends question is one of the most important financial decisions for UK company directors. Here is the optimal strategy for 2025-26, with real numbers.
Why Directors Have a Choice
As a company director and shareholder, you control how your company distributes its profits to you. Unlike an employee who receives only a salary, you can take a combination of:
- Salary — paid via PAYE, subject to income tax and National Insurance
- Dividends — paid from company post-Corporation-Tax profits, taxed at preferential dividend rates with no NI
- Pension contributions — company contributes to your pension, deductible against Corporation Tax, no income tax or NI
The goal is to extract the maximum amount from your company while minimising total tax — including both your personal tax and the Corporation Tax your company pays.
The Optimal Salary Strategy for 2025-26
There are two main salary options most accountants recommend:
Option A: £9,100 Salary (Employer NI Threshold)
£9,100 is the Secondary Threshold for Employer NI in 2025-26. Below this, your company pays no Employer NI (15%) on your salary, and you pay no income tax (below Personal Allowance) and no Employee NI (below Primary Threshold). If your company has only one director and no other employees, it cannot claim the Employment Allowance, making this the cleanest option.
The downside: at £9,100, you do not fully use your £12,570 Personal Allowance. The remaining £3,470 of tax-free capacity is "wasted." However, you can still take dividends to fill this gap.
Option B: £12,570 Salary (Personal Allowance)
Taking a salary equal to the full Personal Allowance maximises your tax-free salary extraction. If your company can claim the Employment Allowance (available if you have other employees or are not a sole director company), the Employer NI on the salary between £9,100 and £12,570 (approximately £525) is eliminated, making £12,570 the clearly superior choice.
Even without Employment Allowance, the extra £3,470 of salary incurs Employer NI of ~£521, but this is a deductible company expense. At 19% Corporation Tax, the true after-all-taxes cost is modest.
Dividend Tax in 2025-26
Once you have taken your salary, you take the rest of your income as dividends. Key figures for 2025-26:
| Dividend Band | Rate | Notes |
|---|---|---|
| Dividend Allowance | 0% | First £500 of dividends — tax-free for all |
| Basic rate band | 8.75% | Dividends using up basic rate band (up to £50,270 total income) |
| Higher rate band | 33.75% | £50,271–£125,140 total income |
| Additional rate | 39.35% | Above £125,140 total income |
Note: dividends are stacked on top of your salary for the purpose of determining which band they fall into. So if your salary is £12,570 and you take £40,000 in dividends, your total income is £52,570 — meaning £500 falls in the dividend allowance, £37,200 in the basic rate band (8.75%), and £2,230 in the higher rate band (33.75%).
Worked Example: £50,000 Company Profit
Your limited company has £50,000 of profit before your salary. You are the sole director/shareholder.
Full Salary Route (all as PAYE at £50,000):
- Company pays Employer NI on salary above £9,100 = (£50,000 − £9,100) × 15% = £6,135
- Company Corporation Tax: £0 (no post-salary profit)
- Your income tax: £7,486 (on a £50,000 salary)
- Your NI: £2,994
- Total tax burden: £6,135 + £7,486 + £2,994 = £16,615
- Take-home: £50,000 − £7,486 − £2,994 = £39,520
Optimal Route (£12,570 salary + dividends, no Employment Allowance):
- Salary: £12,570 → Company pays Employer NI: (£12,570 − £9,100) × 15% = £521
- Remaining profit after salary + Employer NI: £50,000 − £12,570 − £521 = £36,909
- Corporation Tax at 19%: £36,909 × 19% = £7,013
- Post-CT profit available as dividends: £36,909 − £7,013 = £29,896
- Dividend tax: £500 allowance (0%) + £29,396 × 8.75% = £2,572
- Your income tax on salary: £0 (within Personal Allowance)
- Your NI on salary: £0 (below Primary Threshold)
- Total tax burden: £521 + £7,013 + £2,572 = £10,106
- Take-home: £12,570 + £29,896 − £2,572 = £39,894
Tax saving: £16,615 − £10,106 = £6,509 less tax, with nearly the same take-home pay.
Comparison Table: £30k–£100k Profit
| Company Profit | Full Salary Tax | Optimal Route Tax | Annual Saving |
|---|---|---|---|
| £30,000 | £7,540 | £3,240 | £4,300 |
| £50,000 | £16,615 | £10,106 | £6,509 |
| £75,000 | £28,590 | £21,450 | £7,140 |
| £100,000 | £42,432 | £33,870 | £8,562 |
Note: these are approximations. Your actual tax will depend on whether you can claim Employment Allowance, other income sources, pension contributions, and other deductions.
The Role of Pension Contributions
Company pension contributions are even more tax-efficient than dividends. A £10,000 employer pension contribution:
- Reduces company profit by £10,000 before Corporation Tax
- Saves 19–25% Corporation Tax (£1,900–£2,500)
- Does not attract income tax or NI for you personally
Effective cost to the company: just £7,500–£8,100 for a £10,000 pension contribution. This is the most tax-efficient way to extract value from a company, particularly as you approach retirement.
Frequently Asked Questions
What is the optimal salary for a company director in 2025-26?
Most accountants recommend £9,100 (Secondary Threshold, no Employer NI) if you cannot claim Employment Allowance, or £12,570 (full Personal Allowance) if you can. The remaining profit is then extracted as dividends.
How are dividends taxed in 2025-26?
First £500 tax-free (dividend allowance), then 8.75% in the basic rate band, 33.75% in the higher rate band, and 39.35% in the additional rate band. No National Insurance applies to dividends.
Does Corporation Tax affect the decision?
Yes. Salary is tax-deductible for Corporation Tax purposes; dividends are not. This partially offsets the NI cost of salary. At 19% CT, a £1,000 salary actually costs the company £810 net, while a £1,000 dividend extraction requires the company to first pay CT on the underlying profit.