This guide covers the 2025/26 tax year (6 April 2025 to 5 April 2026). For the current year, read our 2026/27 salary and dividend guide.
If you run your own limited company, you decide how to pay yourself. For most owner-managed companies the most tax-efficient approach is a small salary plus dividends. But the right salary changed in 2025/26, because employer National Insurance rose to 15% and the threshold at which employers start paying it fell to £5,000. Here is how the numbers work.
Key rates for 2025/26
| Item | 2025/26 |
|---|---|
| Personal Allowance | £12,570 |
| Basic rate band (England, Wales and Northern Ireland) | £12,571 to £50,270 |
| Employee National Insurance (Class 1) | 8% on earnings from £12,570 to £50,270, 2% above |
| Employer National Insurance (Class 1) | 15% on earnings above £5,000 a year |
| Lower Earnings Limit (State Pension qualifying year) | £6,500 a year (£125 a week) |
| Employment Allowance | £10,500 per employer |
| Dividend allowance | £500 |
| Dividend tax rates | 8.75% basic, 33.75% higher, 39.35% additional |
| Corporation Tax | 19% on profits up to £50,000, 25% over £250,000, marginal relief in between (effective 26.5%) |
Step 1: choose your salary
A director’s salary is a deductible expense for the company, so it saves Corporation Tax. Dividends are paid out of profits after Corporation Tax. The question is where the National Insurance costs start to outweigh that saving.
Option A: £5,000 (no National Insurance at all)
£5,000 is the employer’s secondary threshold for 2025/26, so neither you nor the company pays National Insurance. However, it is below the Lower Earnings Limit of £6,500, so it will not give you a qualifying year for your State Pension unless you get National Insurance credits another way.
Option B: £6,500 (protects your State Pension)
A salary at the Lower Earnings Limit gives you a qualifying year towards your State Pension without paying any employee National Insurance. If the company cannot claim the Employment Allowance, it pays employer National Insurance of £225 (15% of the £1,500 above £5,000).
Option C: £12,570 (usually the most efficient)
A salary of £12,570 uses your full Personal Allowance and stays at the employee National Insurance primary threshold, so there is no income tax or employee National Insurance to pay. Without the Employment Allowance, the company pays employer National Insurance of £1,135.50 (15% of £7,570).
Even so, £12,570 is usually still the best choice, because every pound of salary (plus the National Insurance on it) saves Corporation Tax. As a rough guide, for a company paying Corporation Tax at 19%, £1 of profit paid as salary in this band leaves you about 87p, while the same £1 paid as a dividend in the basic rate band leaves about 74p after Corporation Tax and 8.75% dividend tax.
Step 2: the Employment Allowance
From 6 April 2025 the Employment Allowance rose to £10,500 and the previous £100,000 eligibility cap was removed. It reduces the company’s employer National Insurance bill, so if your company can claim it, a £12,570 salary costs nothing in employer National Insurance.
However, a company cannot claim the Employment Allowance if the only employee paid above the secondary threshold is a director. Most one-director companies are therefore excluded. If you have other employees, or two or more directors on the payroll, the company may qualify. See HMRC’s guidance on claiming the Employment Allowance.
Step 3: take the rest as dividends
After salary, profits can be paid out as dividends, provided the company has enough distributable reserves. For 2025/26:
- the first £500 of dividends is covered by the dividend allowance
- dividends within the basic rate band (up to total income of £50,270) are taxed at 8.75%
- dividends above that are taxed at 33.75%, and at 39.35% above £125,140
Many directors take enough in dividends to use up their basic rate band and leave any further profit in the company, or put it into a pension, to avoid the higher rate.
Worked example: £60,000 profit, one director, 2025/26
Assumptions: a company with £60,000 profit before paying the director, a single director with no other income, living in England, Wales or Northern Ireland, and all available profit paid out up to the basic rate limit. Figures are rounded to the nearest pound.
| Salary £5,000 | Salary £6,500 | Salary £12,570 | Salary £12,570 with Employment Allowance | All salary | |
|---|---|---|---|---|---|
| Salary | £5,000 | £6,500 | £12,570 | £12,570 | £52,826 |
| Employer NI | £0 | £225 | £1,136 | £0 | £7,174 |
| Corporation Tax | £10,825 | £10,368 | £8,796 | £9,012 | £0 |
| Dividends | £44,175 | £42,907 | £37,499 | £37,700 | £0 |
| Dividend tax | £3,159 | £3,180 | £3,237 | £3,255 | £0 |
| Income tax and employee NI | £0 | £0 | £0 | £0 | £11,630 |
| Take-home pay | £46,016 | £46,228 | £46,831 | £47,015 | £41,197 |
In this example, a £12,570 salary leaves the director about £815 better off than a £5,000 salary, and about £5,600 better off than taking everything as salary. With the Employment Allowance, £718 of profit is also left in the company because the dividends needed to fill the basic rate band are lower.
Other points to consider
- Scottish taxpayers: a £12,570 salary is still covered by the Personal Allowance, and dividends are taxed at the UK rates above. Scottish income tax rates only matter if you take a higher salary.
- Pension contributions: employer pension contributions are usually deductible for Corporation Tax and free of National Insurance, which can make them more efficient than higher-rate dividends. See our guide to pension contributions for directors.
- Paperwork: salary must be run through payroll (RTI), and every dividend needs board minutes and a dividend voucher. Read what are dividends.
- Reporting dividends: if your dividends are over £10,000 you must complete a Self Assessment tax return. See tax on dividends.
- Director’s loans: taking money without declaring salary or dividends can create an overdrawn director’s loan account. See our director’s loan account guide.
Summary
For 2025/26, most directors of owner-managed companies are best taking a salary of £12,570, whether or not the company can claim the Employment Allowance, with further income as dividends up to the basic rate limit. A salary of at least £6,500 protects your State Pension record. Every situation is different, so take advice before setting your pay.
Want us to work out the best mix for you? Contact us, call 0845 862 6009 or message us on WhatsApp. See also our payroll service.
Sources: HMRC rates and thresholds for employers 2025 to 2026, Income Tax rates and allowances, and Corporation Tax rates on GOV.UK. This article gives general information only and does not constitute professional advice.