Salary vs. Dividend: The Most Tax-Efficient Way to Pay Yourself (2025/26 Guide)
As a Director of a Limited Company in the UK, you have a unique advantage that employees do not: control over how you are paid. You can choose to take a salary (PAYE), dividends, or a combination of both.
Most new directors assume that paying themselves a higher salary is "safer" or better for getting a mortgage. However, purely from a tax perspective, a high salary is often the most expensive mechanism for profit extraction. This is primarily due to National Insurance Contributions (NICs), which acts as a double tax (Employer + Employee) on salaries but does not apply to dividends at all.
The "Optimal" Director Salary for 2025/26
For the 2025/26 tax year, the strategy for most directors remains consistent: take a distinct "low salary" and top up the rest of your income with dividends.
The optimal salary for limited company directors is usually set at the Primary Threshold (£12,570). Here is why this specific figure works:
- Tax Free: It matches your Personal Allowance, so you pay £0 Income Tax on it.
- State Pension: It is above the Lower Earnings Limit (£6,396), so it counts as a qualifying year for your State Pension.
- NI Efficiency: It is exactly at the Primary Threshold, so you pay £0 Employee National Insurance.
Note: Since the Secondary Threshold (Employer NI) is approx. £9,100, your company will pay 13.8% NI on the difference (£12,570 - £9,100). However, this cost is usually outweighed by the Corporation Tax savings, as salary is a deductible business expense.
Understanding Dividend Tax Rates UK
Once you have used up your Personal Allowance with your salary, any further income taken as dividends is taxed at specific dividend rates. Crucially, you get a £500 Dividend Allowance which is tax-free.
| Income Band | Tax Rate |
|---|---|
| Allowance (First £500) | 0% |
| Basic Rate (up to £50,270) | 8.75% |
| Higher Rate (£50,271 - £125,140) | 33.75% |
| Additional Rate (over £125,140) | 39.35% |
Case Study: £80,000 Profit
Let's look at a real-world scenario. James runs an IT consultancy with £80,000 in gross profit. He wants to extract as much cash as possible.
Route A: High Salary (£80,000)
If James pays himself an £80,000 salary, he pays huge National Insurance contributions. He pays roughly £5,300 in Employee NI and his company pays over £9,700 in Employer NI. Total tax paid to HMRC is significant, leaving him with less in his pocket.
Route B: Smart Interaction (£12,570 Salary + Dividends)
James takes a £12,570 salary. The remaining profit (after salary and minor Employer NI costs) is subject to Corporation Tax. The post-tax profit is then distributed as dividends.
Even though James pays 19-25% Corporation Tax, the absence of National Insurance on the dividends means histotal take-home pay is significantly higher—often by thousands of pounds.
Why Corporation Tax Changes Everything
Since the rise of the main Corporation Tax rate to 25% for profits over £250,000 (and the marginal relief taper starting at £50,000), the calculation is more complex than before. Salary is a deductible expense, meaning it reduces your Corporation Tax bill. Dividends are paid from post-tax profits, so they do not reduce your Corporation Tax bill.
Despite this discrimination against dividends, the math strictly holds up for 2025/26: avoiding National Insurance is usually the priority. Use our dividend vs salary 2025/26 calculator above to run your specific numbers.