The Director's Guide to Salary & Dividends — 2025/26 and 2026/27
Running your own Personal Service Company (PSC) or owner-managed limited company gives you a powerful tax-planning tool: the ability to choose how much to take as a salary versus how much to take as dividends. Getting this mix right can save thousands every year.
Why Directors Combine Salary and Dividends
Salaries are subject to Income Tax and National Insurance (both employee and employer). Dividends, paid from a company's post-corporation-tax profits, are only subject to Dividend Tax — a significantly lower rate than employment income. By taking a small salary and extracting remaining profits as dividends, directors can legally reduce their overall tax bill.
Lower NI Exposure
Dividends are not subject to National Insurance. A salary above the NI threshold triggers both employee (8%) and employer (15%) contributions.
Dividend Tax Rates
Basic rate dividend tax is just 8.75% — compared to 20% income tax + 8% NI. For higher rate taxpayers, dividends are taxed at 33.75% vs 40% + 2% NI.
Company Deduction
Salary is a deductible business expense, reducing Corporation Tax. Dividends are paid from after-tax profits — so the overall saving requires careful modelling.
Optimal Salary Levels for 2025/26
Most director/shareholder guides suggest one of three salary levels. The right one depends on your circumstances, whether you have other employees, and whether you qualify for Employment Allowance.
Option 1: Lower Earnings Limit (£6,500)
Pension-friendlyPaying yourself above the Lower Earnings Limit (£6,500 in 2025/26) keeps you "in the system" for State Pension qualifying years — with zero NI liability for the company or employee. No employer NI. Ideal if you have other income sources or a spouse also drawing salary.
Option 2: NI Primary Threshold (£12,570)
Most popularPaying up to £12,570 (the NI Primary Threshold and also the full Personal Allowance) means: zero employee NI, zero employer NI (assuming you claim Employment Allowance), no income tax (salary = personal allowance). Any income above this via dividends is then taxed at the lower dividend rates. This is the most commonly recommended level for sole directors not claiming Employment Allowance.
Option 3: Basic Rate Band Ceiling (£50,270)
Higher extractionSome directors maximise salary up to the higher rate threshold (£50,270) — especially useful if the company has a large payroll eligible for Employment Allowance (£10,500 in 2025/26). The salary is deductible for Corporation Tax, partially offsetting the NI cost. Only relevant when employment allowance cancels employer NI liability.
Employer NI — The Hidden Cost Directors Often Miss
From April 2025, employer National Insurance was raised to 15% on salary above £5,000 (down from the previous £9,100 secondary threshold). This is a significant increase that directly affects how much salary it's cost-effective to draw.
At £12,570 salary (sole director, no Employment Allowance)
(£12,570 − £5,000) × 15% = £1,135.50 employer NI
This cost sits with the company, not the director personally — but it reduces distributable profits available for dividends.
Employment Allowance (£10,500 in 2025/26)
If eligible, wipes out up to £10,500 of employer NI liability
Sole directors with no other employees are NOT eligible for Employment Allowance. Companies with one or more other employees may claim it.
True Cost of Salary vs Dividends (2025/26 Example)
| Scenario | Salary | Dividends | Employer NI | Personal Tax | Net Take-Home |
|---|---|---|---|---|---|
| Low salary strategy | £12,570 | £40,000 | £1,136 | £2,752 | £49,818 |
| Mid salary strategy | £25,000 | £27,570 | £3,000 | £5,940 | £46,630 |
| High salary strategy | £50,270 | £2,300 | £6,791 | £14,870 | £37,700 |
Illustrative only. Assumes sole director, no Employment Allowance, no pension contributions. Company profit assumed £52,570.
Dividend Tax Rates 2025/26 & 2026/27
Dividend tax rates have not been announced to change for 2026/27. The following rates apply for both years under current HMRC guidance:
0%
Dividend Allowance
First £500
8.75%
Basic Rate
£500 – £50,270 combined
33.75%
Higher Rate
£50,271 – £125,140
39.35%
Additional Rate
Above £125,140
Important: Your salary fills the tax bands first, then dividends sit on top. If your salary already reaches the higher rate threshold (£50,270), all taxable dividends will be taxed at 33.75% or higher. This is why keeping salary below the higher rate threshold is critical to maximising dividend tax efficiency.
Planning Ahead for 2026/27
Tax thresholds are frozen until April 2028 under the current government's plans. This means:
Fiscal Drag
With salary and dividend income likely rising with inflation, more directors will be dragged into higher rate territory even without a pay rise. If your total income crosses £50,270, an increasing share of dividends will face the 33.75% rate.
Personal Allowance Taper
If your total income exceeds £100,000, your Personal Allowance reduces by £1 for every £2 of excess income — creating an effective 60% marginal tax rate between £100k–£125,140. Directors should plan extraction carefully around this cliff.
Pension Contributions
Employer pension contributions made by the company are deductible for Corporation Tax and do not trigger NI. This is often the most tax-efficient way to extract additional value beyond the salary/dividend mix.
Spouse/Partner Planning
If your spouse or civil partner is a shareholder, dividends can be allocated to them at a lower tax rate. This requires a proper shareholding structure and HMRC will scrutinise "settlements" arrangements — take professional advice.
⚠️ IR35 — The Rules That Change Everything
If your PSC engages with clients where HMRC deems you to be a "disguised employee" under IR35 (also known as the off-payroll working rules), the salary + dividend strategy does not apply. Your income would need to be treated as employment income, subject to full PAYE and NI.
Since April 2021, medium and large private sector clients (and all public sector clients) are responsible for determining IR35 status. If you operate through a PSC and provide services to such clients, you should obtain a Status Determination Statement (SDS) and take professional IR35 advice before structuring your remuneration.
How to Use This Calculator — Step by Step
- 1
Select your tax year
Choose 2025/26 (current year, April 2025 – April 2026) or 2026/27 to plan ahead. Thresholds are frozen so rates are identical across both years.
- 2
Enter your proposed salary
Try the recommended low-salary levels: £6,500 (Lower Earnings Limit) or £12,570 (NI Primary Threshold / Personal Allowance). The calculator shows employer NI automatically.
- 3
Enter dividend income
Enter the total dividends you plan to extract. Make sure your company has sufficient distributable profits after Corporation Tax to support this.
- 4
Add pension contributions
Optional. Employee pension % reduces your taxable income. Consider employer pension contributions separately (not captured here) for maximum efficiency.
- 5
Review the full breakdown
Check your net take-home, effective tax rate, and the employer NI burden. Adjust the salary/dividend split to find your optimal position.
Frequently Asked Questions
Can I take a salary of £0 and just pay myself in dividends?▼
Technically yes, but it is rarely optimal. Taking no salary means no NI qualifying year for State Pension purposes, and you lose the Corporation Tax deduction on salary. At minimum, taking salary equal to the Lower Earnings Limit (£6,500) protects your pension entitlement at zero NI cost.
Does the company pay Corporation Tax before paying dividends?▼
Yes. Dividends must be paid from post-corporation-tax profits. The main rate of Corporation Tax for profits above £250,000 is 25% in 2025/26. Small profits under £50,000 are taxed at 19%. Marginal relief applies between £50k to £250k. You cannot pay dividends in excess of distributable reserves.
What is the most tax-efficient salary for 2025/26?▼
For most sole directors without Employment Allowance, £12,570 remains the optimal salary — matching the Personal Allowance and Primary NI Threshold. This maximises the tax-free salary while triggering £1,135.50 in employer NI (which the company can deduct). The company saves 19 to 25% Corporation Tax on the salary, partially offsetting the NI cost.
How does employer NI affect dividends?▼
Employer NI is paid by the company on salary, not deducted from the employee take-home. However, it reduces the company distributable profits — leaving less available for dividends. This is why the calculator shows Total Employer Cost separately, giving the true cost to the business.
Is the £500 Dividend Allowance per person or per company?▼
Per individual. Each shareholder has a £500 Dividend Allowance regardless of how many companies they hold shares in. This applies to all UK dividend income including ISA-exempt dividends (ISA dividends are exempt separately).
What happens if I miss the dividend paperwork?▼
Dividends must be properly declared with a valid board minute and dividend voucher. Without this documentation, HMRC may reclassify the payment as a directors loan or salary — triggering NI, penalties, and potential Section 455 tax (32.5% on outstanding directors loan balances). Always maintain proper records.
Always take professional advice
This calculator provides a guide estimate only. Tax planning for limited company directors involves Corporation Tax, IR35, PAYE, directors' loan accounts, pension strategies and more. We strongly recommend working with a qualified UK accountant or tax advisor before finalising your remuneration structure.