One of the most common questions we hear from limited company directors is: how should I pay myself? The answer involves a balance between salary, dividends, corporation tax, and National Insurance — and it changes slightly each year as rates and thresholds shift.
Here is the current thinking for 2025/26, what has changed, and what you need to watch out for.
Why the salary and dividend split matters
As a director of your own limited company, you have a choice about how to extract profit. You can pay yourself a salary, which is subject to income tax and National Insurance. Or you can take dividends from the company's post-tax profit, which are taxed at lower rates and attract no National Insurance.
The reason most directors use a combination of both is that the optimal tax position usually involves a relatively low salary — enough to maintain your National Insurance record — with the remainder taken as dividends. The exact figures depend on your personal circumstances, but the principle is consistent.
The recommended salary for 2025/26
The most tax-efficient salary for a sole director in 2025/26 depends on whether you are eligible for the Employment Allowance.
| Situation | Recommended Salary | Reason |
|---|---|---|
| Sole director, no other employees | £12,570 | Uses full personal allowance, no employee NIC, but employer NIC applies above £5,000 |
| Company with other employees, Employment Allowance claimed | £12,570 | Employer NIC offset by allowance |
| Director wanting to minimise all NIC | £9,100 (approx) | Below the NIC lower earnings limit in some structures |
Important change for 2025/26: The employer NIC threshold dropped from £9,100 to £5,000. This means sole directors paying themselves any salary above £5,000 now incur employer NIC at 15% on the excess. For a salary of £12,570, that is approximately £1,135 in employer NIC — which is a company cost and corporation tax deductible, but still a real outlay. The Employment Allowance cannot be claimed by companies where the sole employee is also a director.
Dividend allowance and rates in 2025/26
Dividends are paid from your company's profits after corporation tax. You then pay personal dividend tax on the income above the dividend allowance.
| Dividend Band | Rate |
|---|---|
| Dividend Allowance (first £500) | 0% |
| Basic Rate (within basic rate band) | 8.75% |
| Higher Rate (above £50,270 total income) | 33.75% |
| Additional Rate (above £125,140) | 39.35% |
The dividend allowance was cut from £2,000 to £1,000 in 2023/24 and again to £500 in 2024/25, where it remains for 2025/26. This is a significant reduction from the £5,000 allowance that existed before 2018 — and it means more of your dividends are now taxable.
A worked example for 2025/26
Assume you are a sole director with no other income, and your company makes £80,000 profit before your salary.
- You pay yourself a salary of £12,570
- The company deducts this as an expense, reducing the taxable profit to £67,430
- Corporation tax at 19% (assuming no associated companies and profit below £50,000 after salary) — approximately £12,812
- Remaining profit of £54,618 available for dividends
- You take the full £54,618 as dividends
- First £500 tax-free (dividend allowance)
- Remaining £54,118 falls within the basic rate band after the salary has used the personal allowance
- Dividend tax at 8.75% — approximately £4,735
Total personal tax: approximately £4,735 plus employer NIC of approximately £1,135. Combined effective rate on the original £80,000: around 22%. Compare this to a sole trader paying income tax and Class 4 NIC on the same profit, where the effective rate would be considerably higher.
Pros and cons of this approach
Advantages of salary plus dividends
- Significantly lower effective tax rate compared to employment income or sole trading
- No employee National Insurance on dividends
- Flexibility — you can vary the dividend amount each year based on profit
- Salary maintains your State Pension entitlement and other NI-linked benefits
Disadvantages and things to watch
- Dividends can only be paid from genuine distributable profit — you cannot pay a dividend if your company has not made a profit, and doing so incorrectly creates a director's loan issue
- The reduced dividend allowance means more dividend income is now taxable than a few years ago
- If your total income pushes above £50,270, dividends attract the higher rate of 33.75%
- Mortgage and loan applications can be harder when your income is primarily dividends — lenders treat it differently to salary income
- If you also have other income — rental, employment, savings interest — the interaction can push you into unexpected tax positions
What has changed and what to review
The employer NIC threshold change is the most significant development for 2025/26. The practical effect is that a salary of £12,570 now costs the company more in NIC than it did last year. Some directors are reconsidering whether a lower salary — around £9,100 — makes more sense, accepting slightly less corporation tax relief in exchange for lower NIC.
There is no single right answer. The optimal split depends on your company's profitability, your other income sources, your plans for the business, and personal factors like pension contributions and mortgage applications. This is exactly the kind of thing that should be reviewed with your accountant at the start of each tax year, not as an afterthought.
Review your remuneration structure
We help directors find the most tax-efficient approach each year, taking into account all the relevant factors. It is one of the most valuable conversations you can have with an accountant.
Talk to UsThis article is for general information purposes and does not constitute tax advice. The optimal remuneration strategy depends on individual circumstances. Please speak to a qualified accountant before making decisions about your pay structure.