The tax landscape for directors and shareholders of small limited companies is ever-changing. With the new rules set out in the 2024 Autumn Budget, this article breaks down the most tax-efficient salary and dividend combinations for the 2025/26 tax year. We’ll use tables to illustrate calculations and comparisons, ensuring clarity for directors seeking to optimize their financial decisions.
Key Tax Rules for 2025/26
Here’s a summary of the tax rules for taxpayers in England, Wales, and Northern Ireland starting from 6th April 2025:
Allowance/Threshold | Amount |
Personal Tax-Free Allowance | £12,570 |
Tax-Free Dividend Allowance | £500 |
Basic Rate Limit | £50,270 |
Additional Rate Threshold | £125,140 |
Dividends exceeding the £500 tax-free limit are taxable.
Salary and dividends remain the most tax-efficient combination for extracting profits.
Here are two approaches to determine the most tax-efficient extraction strategy for 2025/26:
Option 1: Without NI Employment Allowance
This option applies if you are the only employee of your company. In this case, your company cannot claim the NI Employment Allowance, which would otherwise reduce your company’s National Insurance bill. Here’s how it works:
Salary :You should pay yourself a modest salary of £5,000 per year. This amount is just below the threshold where Employer’s NI contributions start. It ensures that your company avoids additional costs while keeping your salary tax-efficient.
Dividends :Since dividends are not subject to National Insurance, the rest of your income can be taken as dividends. In this case, you can pay yourself dividends of £45,270 without hitting the higher tax rate.
Key Benefits
A low salary means minimal or no National Insurance is payable by your company or you.
Dividends are taxed at the lower dividend tax rates (starting at 8.75% for the basic rate band).
Example Calculation
Income Type | Amount (£) | Tax Notes |
Salary | 5,000 | Fully covered by your personal allowance. |
Dividends (Tax-Free Allowance) | 500 | Covered by the dividend allowance. |
Taxable Dividends | 37,200 | Taxed at 8.75% (basic rate). |
Total Tax Liability | 3,255 | Dividends tax only. |
Option 2: With NI Employment Allowance
This option applies if your company has another employee—such as a family member who genuinely works for the business. Here, your company can claim the NI Employment Allowance, which offsets up to £10,500 of employer National Insurance contributions. With this allowance, you can afford to pay yourself a higher salary without extra employer NI costs.
Salary : You can pay yourself up to the full £12,570 personal allowance. This is tax-free because it stays within the tax-free threshold.
Dividends : With a higher salary, the amount you can take in dividends without exceeding the basic rate band is reduced to £37,700. However, the tax treatment remains the same.
Key Benefits
A higher salary means more of your income is tax-deductible for your company, resulting in greater corporation tax savings.
Despite taking a higher salary, your personal tax liability on dividends remains unchanged compared to the first option.
Example Calculation
Income Type | Amount (£) | Tax Notes |
Salary | 12,570 | Fully covered by your personal allowance. |
Dividends (Tax-Free Allowance) | 500 | Covered by the dividend allowance. |
Taxable Dividends | 37,200 | Taxed at 8.75% (basic rate). |
Total Tax Liability | 3,255 | Dividends tax only. |
Additional Corporation Tax Savings
A higher salary reduces your company’s taxable profit, saving corporation tax. For example:
Salary Level | Corporation Tax Deduction (@ 25%) |
£5,000 | £1,250 |
£12,570 | £3,142.50 |
Extra Saving | £1,892.50 |
Which Option Should You Choose?
Without NI Employment Allowance
Best for single-director companies where you don’t employ anyone else.
Keeps things simple with minimal salary and maximized dividends.
With NI Employment Allowance
Ideal if you employ a family member or someone else in the business.
Offers additional tax savings through a higher salary and reduced corporation tax.
Alternative Profit Extraction Strategies
Beyond salary and dividends, consider the following:
Pension Contributions:
Company pension contributions reduce its corporation tax bill and are not counted as a taxable benefit for you.
Timing Dividends:
Spreading dividends across tax years can help you stay within the basic rate band.
Year-End Assessment:
Assessing profits and your tax position before year-end allows strategic dividend decisions.
For the 2025/26 tax year, the choice of salary and dividends depends on whether you can claim the NI Employment Allowance:
Single Director Companies: Worse off, as they can only adopt Option 1.
Employing Family Members: A cost-effective way to claim the allowance and adopt Option 2
If you are still not sure which option is best for you, get in touch for a free consultation at hello@visionaccountants.co.uk or 07542229442.
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