For many owner-managed limited companies, the question is not whether to take a mix of salary and dividends, it’s how much of each.

The short answer? The “small salary, balance as dividends” structure is still the most tax-efficient route for most directors in 2025/26. The details have shifted and getting them wrong could cost you thousands in extra tax or even reduce your future State Pension.

Let’s break down exactly what has changed, the figures we recommend, and why.

Salary vs Dividends

Before we get into the numbers, it’s worth being clear about what these terms actually mean:

Salary – paid through PAYE, counts as employment income, subject to Income Tax and National Insurance. It is an allowable business expense, reducing Corporation Tax.

Dividends – payments made to shareholders from post-tax profits. They are not an allowable business expense for Corporation Tax. Instead, they are taxed separately at dividend rates once received by you.

Why this distinction matters

We often hear directors talk about “paying themselves dividends as salary”. In HMRC’s eyes, that is a dangerous mix-up. If you record dividends as if they were salary, you may be liable for Employers’ and Employees’ NI plus PAYE tax you weren’t expecting.

When dividends are not an option

Unlike salary, you cannot pay dividends unless your company has sufficient post-tax distributable profits. That means:

A new company running at a loss cannot issue dividends until it generates profits.
An insolvent company cannot legally declare dividends.

If you take money out as dividends when profits aren’t there, HMRC can reclassify it as a director’s loan or unlawful distribution, bringing extra tax charges and potentially personal liability.

Why the salary plus dividends approach is still worth it

Before last year’s Autumn Budget, the gap between taking a salary and taking dividends was narrowing. In some cases, it looked like the strategy might not be worth the extra administration.

With National Insurance changes from April 2025, the numbers are tilting back in favour of a small salary plus dividends. The increase in Employers’ NI has added complexity but also made our recommended approach more efficient overall.

The 2025/26 director’s salary sweet spot

From 6 April 2025:

  • Earnings above £5,000 per year (£416 per month) trigger 15% Employers’ National Insurance for the company
  • You need to earn at least £9,096 per year to get a qualifying year for your State Pension
  • At that pension-qualifying level, Employers’ NI of £614 is due

So why do we recommend a salary higher than that, even though it means paying more NI?

Because:

  • Salary and Employers’ NI are both deductible for Corporation Tax purposes
  • At our suggested £12,570 per year (£1,047 per month) salary, the Corporation Tax saving is between £2,604 and £3,631, depending on your company’s marginal rate
  • After factoring in the extra NI cost, the net tax saving is up to £2,496

There is no personal tax payable on this salary level if your total taxable income is under £100,000 and you have no other employment income.

The recommended mix for 2025/26

To maximise efficiency, we suggest drawing income up to the top of the Basic Rate tax band:

MonthlyAnnual
Salary£1,047.00£12,564
Dividends£3,142.00£37,704
Total£4,189.00£50,268

Estimated total tax: £271.25 per month / £3,255 per year

Net income: £3,917.75 per month / £47,013 per year

This assumes no other income (interest, rental income, etc.) is using up your Basic Rate band and that your company has enough post-tax profits to pay dividends at this level.

Dividends above this will be taxed at 33.75% until your total taxable income hits £100,000.

The National Insurance timing trap for directors

One quirk for directors is that NI is calculated on a cumulative basis for the tax year.

If your company has no other employees, the new Employers’ NI will first become payable around August 2025. This is because the first £5,000 of earnings is NI-free and gets used up over the first few months.

This means:

  • If you are used to no NI bills until the year-end, expect them to start mid-year
  • Even small administrative changes, such as having to pay HMRC monthly, can trip up smaller companies who have not had to before

A note for R&D claimants

If your company claims R&D relief and you are actively involved in eligible projects:

  • Salary and pension contributions count as qualifying R&D costs
  • Dividends do not

If you are claiming R&D every year, we would consider a mix of salary and dividends that works in the long-term. One-off R&D projects need careful planning too.

You cannot switch directors back and forth between salary-heavy years and dividend-heavy years without a longer-term plan. We build our recommendations around your intentions so you maximise both tax efficiency and claim value.

Don’t forget how dividends are shared

Dividends have to be paid in line with shareholdings. So, if you and a spouse each own 50% of the company, you’ll each receive 50% of any dividend declared.

That can create issues if one of you has other income, such as employment, which pushes them into a higher tax band. In those cases, the same dividend can end up costing one shareholder more tax than the other.

This is where advance planning matters, different share structures and planning options exist, but these go beyond the basics of this article. Get in touch with us for advanced planning on this.

How we handle this at A4G

While this guide explains the general position, every client’s circumstances are different. As an A4G client, your director pay mix is something we review every year both when we prepare your draft accounts and again when we review your personal tax return to make sure it’s still the best option for you.

This is especially important given regular Budget changes, shifts in NI thresholds, and the potential impact on things like State Pension, Child Benefit, R&D claims, and cash flow.

The bottom line

For most owner-directors in 2025/26:

  • A salary of £12,570 per year plus dividends up to the Basic Rate limit is the most efficient route
  • Employers’ NI will be payable, but the Corporation Tax savings outweigh the cost
  • Keep your salary above £9,096 to protect your State Pension record
  • Only take dividends if your company has enough post-tax profits – losses or insolvency mean dividends are not an option
  • Always check you have enough post-tax profits before declaring dividends
  • If you’re doing R&D, remember that only salary and pension contributions count towards your claim

If you have other income, unusual profit patterns, or want to take more than the Basic Rate limit, the calculations change. That’s why we always run tailored figures before you decide.

Need to make sure your mix is spot-on for 2025/26?

Our Client Managers can calculate the most tax-efficient structure for you taking into account your whole financial picture, from R&D claims to pension planning so you keep more of your hard-earned profits without unwanted HMRC surprises.
Book a free consultation

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