The 2025/26 tax year brings significant changes to the employment allowance, national insurance. These changes make it more complex for Limited Company directors to determine the best way to pay themselves. The optimal strategy for salary and dividends will vary based on individual and business circumstances. This guide breaks down the key options for different scenarios.
Please note: The advice here does not apply to loss-making businesses or those engaged in research and development (R&D), as other factors may be relevant.
One Director/Shareholder
For a business with only one director and shareholder, here are the key recommendations for tax-efficient salary and dividends, assuming no other income has been received during the tax year and no personal pension or Gift Aid contributions have been made.
Recommended Salary and Dividends:
Salary: We recommend taking a salary of £12,570. This ensures you stay within the personal income tax allowance, and you will not be liable for income tax or employee National Insurance (NI).
Dividends: After salary, you can take up to the basic rate dividend threshold of £37,700, bringing your total income to £50,270. This amount is tax-efficient.
If you make personal pension contributions or Gift Aid donations, these can increase the tax-efficient amount you can draw as dividends.
Employer's National Insurance (NI):
For the 2025/26 tax year, Employer’s National Insurance will be due on salaries above £5,000. For a salary of £12,570, the total Employer’s NI will amount to £1,135.50 (an increase from £478 last year). However, there are ways to reduce this cost.
Consider Bringing On a Spouse or Family Member to Payroll:
We highly recommend considering bringing on a spouse or family member to your payroll and paying a salary between £5,001 to £12,570 (it's worth making them a director if you pay them more than £10,000 to avoid pension auto-enrolment). By employing them and paying a salary above £5,000, your company will qualify for the Employment Allowance, which covers the first £10,500 of Employer’s NI. This would reduce your overall NI liability, including the £1,135.50 for a £12,570 salary.
If you choose to bring a spouse or family member onto the payroll, please refer to the guidance below for two directors.
Example 1: Spouse as a Higher-Rate Taxpayer
Spouse employed with a salary of £12,570
They pay 40% income tax, which is £5,028
The business receives £2,388 corporation tax relief (at 19% tax rate)
Employer's NI saving post-tax relief = £919
Effective tax rate: 13.6%
Example 2: Spouse as a Basic-Rate Taxpayer
Spouse employed with a salary of £12,570
They pay 20% income tax, which is £2,514
The business receives £2,388 corporation tax relief (at 19% tax rate)
Employer's NI saving post-tax relief = £919
Effective tax rate: £793 tax saving!
Note - the benefit is higher, the higher your Corporation tax rate.
Other Income:
If you have other sources of income, it will affect the amount of dividends you can take efficiently. The goal is to keep your total income at or below £50,270 to ensure you remain within the most tax-efficient bracket.
If you're unsure about how your other income affects your tax-efficient salary and dividends, please get in touch with us for guidance.
Becoming a Director Mid-Year:
If you become a director partway through the tax year, your salary should be pro-rated accordingly. In addition, if you have other income, it's best to get in touch with us to ensure you’re taking the most tax-efficient salary and dividends for the remainder of the year.
Two Directors/Employees
When a business has two directors or when you bring on a family member or spouse as a director, the situation becomes more complex due to the potential for corporation tax savings (which range from 19% to 25%). The options for salary and dividends will depend not only on your income levels but also on the current corporation tax rate your company is subject to. Here's a breakdown of how this works depending on your circumstances:
Higher Rate External Income (Income Below £100,000)
If you have external income (e.g. salary from another job) over the higher-rate tax threshold (£50,270), the most tax-efficient option is often to take a salary of £12,570 for both directors. If you need to draw more funds, it may be more tax-efficient to take additional salary rather than dividends, up to a combined total of £80,000 for both directors.
Beyond this salary threshold, dividends may be more beneficial, especially if the corporation tax rate is higher (up to 25%). We recommend not exceeding £100,000 in income, as this will push you into the additional rate tax band.
No External Income or Small Amounts of External Income
If you or the other director do not have external income, or only have small amounts of income at the basic tax rate, the choice between salary and dividends should be reviewed on a case-by-case basis, taking into account your corporation tax rate.
To maintain tax efficiency, the recommended total income should still be £50,270. The strategy will depend on your business's corporation tax rate.
Here’s how your tax-efficient income varies with the corporation tax rate (you can see your current corporation tax rate by heading to reports > corporation tax and looking at the average rate being applied) :
Corporation Tax Rate | Effective Tax Rate on Salary | Recommendation |
19% | 9% | Take £12,570 salary and dividends up to £50,270 total income. |
20% | 8% | Take £12,570 salary and dividends up to £50,270 total income. |
21% | 7% | Take salary up to £50,270 – consider overall tax savings and administrative effort for PAYE. |
22% | 6% | Take salary up to £50,270 – consider overall tax savings and administrative effort for PAYE. |
23% | 5% | Take salary up to £50,270 – consider overall tax savings and administrative effort for PAYE. |
24% | 4% | Take salary up to £50,270 |
25% | 3% | Take salary up to £50,270 |
If you want to draw more income than £50,270, taking salary remains the most efficient up to the point where the total salary paid by the company to both employees reaches £80,000. Beyond that, dividends may become more tax-efficient, depending on the corporation tax rate.
More Than Two Employees
For businesses with more than two employees, the situation becomes more tailored to your specific circumstances. We highly recommend seeking personalised accounting advice from our team to ensure you are maximising your tax efficiency.
Earning Over £100,000 Externally
If your external income exceeds £100,000, the marginal rate of tax will be very high. In this case, it is generally more beneficial to leave funds within the business rather than drawing them out as salary or dividends. However, if you are still keen to draw funds from the business, it’s best to contact us directly for tailored advice.
Conclusion
The 2025/26 tax year brings changes that make tax planning for Limited Company directors more complex. The most tax-efficient strategy will depend on your individual and business circumstances, including whether you have other income and the corporation tax rate your company is subject to.
If you’re unsure about your options, or if your situation involves complexities like multiple directors or higher external income, we encourage you to get in touch with us for personalised advice.
For those clients on our Full Service plan, you can discuss what is best for your business directly with your dedicated accountant.