Tax Efficient Salary and Dividend for 2025-26 Tax Year

Getting the right balance between salary and dividends is one of the most effective ways for company owners to minimise tax and maximise take-home pay. With the 2025/26 tax rules now confirmed, directors of limited companies especially those with profits under £100k or running businesses with spouses should review their remuneration strategy to ensure it still works in their favour.

Here’s a breakdown of the most tax-efficient approaches depending on profit levels and company structure.

1. Single director-owner with pre-tax profits below 50,000 pounds
2. Single director-owner with pre-tax profits between 50,000 pounds and 100,000 pounds
3. Husband-and-wife directors with pre-tax profits over 100,000 pounds

• Corporation tax can range from 19 for profits under 50,000 pounds to 25 for profits over 250,000 pounds, with marginal relief up to 250,000 pounds.
• Personal allowance (PA) remains at 12,570 pounds, while the dividend allowance is 500 pounds.
• Dividend tax rates for 2025–26: 8.75 basic rate, 33.75 higher rate, and 39.35 additional rate.
• National Insurance (NI) thresholds and rates: 15 employer NIC above 5,000 pounds, and no Employment Allowance (EA) if there is only one director on the payroll. The EA is 10,500 pounds in 2025–26 and can fully offset employer NIC if there are multiple employees.

Corporation tax on profits under 50,000 pounds is 19%. As a sole director-employee, the company is not eligible for the Employment Allowance, so employer NIC at 15% applies above 5,000 pounds of salary. Common salary approaches include:

• Minimal salary around 6,500 pounds: above the Lower Earnings Limit (LEL), so it secures NI credits toward the State Pension, but keeps employer NIC low.
• Full personal allowance salary of 12,570 pounds: triggers employer NIC above 5,000 pounds, but the corporation tax deduction outweighs the NIC cost, often resulting in slightly higher take-home pay.
• Figures are approximations and not meant to be exact calculations however the conclusions are unaffected.  

Example Calculation (pre-tax profit of 45,000 pounds)

In this illustration, a higher salary up to the personal allowance produces about £1,050 pounds more in total take-home compared to a salary of £6,500 pounds.

Profits in this range face marginal corporation tax rates between 19% and 25%. Typically, the effective rate is around 22–23%, and each additional pound of profit in the marginal band can be taxed at 26.5%. Paying a full salary up to £12,570 pounds usually saves enough corporation tax to offset employer NIC, even without the Employment Allowance. Dividends beyond that salary may fall partly into the higher dividend tax band at 33.75%.

Example Calculation (pre-tax profit of £100k)

The full salary option increases overall take-home by around 2,200 pounds.

A husband-and-wife company with multiple employees can claim the £10,500 Employment Allowance, eliminating employer NIC costs on salaries up to that limit. Each spouse can take a salary of £12,570 tax-free, saving about 25% in corporation tax for each pound of salary with no net employer NIC cost.

Splitting dividends between two spouses takes advantage of two personal allowances, two basic rate bands, and two dividend allowances, significantly reducing higher-rate or additional-rate tax on dividends.

Example Calculation (pre-tax profit of £120k, 50/50 ownership)

We compare minimal salaries (£6,5k each) to full personal allowance salaries (£12,5k each). Both spouses then share remaining profits as dividends.

Paying the full personal allowance salaries yields about £2,500 more net household income, mainly because the higher combined salaries reduce taxable profits without incurring employer NIC due to the Employment Allowance. Both spouses remain within basic rate for their dividends, paying 8.75%.

This strategy is highly efficient for extracting profits over £100k.