A quick note: this article is general information, not personal advice. Tax and accounting rules change and everyone's situation is different, so please don't act on anything here without checking how it applies to you. We'd be happy to help — get in touch before making any decisions.
Come January, with self-assessment season in full flow, one question lands on our desk more than any other: "Am I taking the most tax-efficient mix of salary and dividends?" For owner-managed limited companies in 2025/26, the honest answer is that it depends on your circumstances, though there is a sensible default most people can start from. Let me show you how the maths actually works. (Planning for the current year instead? See our 2026/27 salary and dividends guide.)
Key takeaways
- For 2025/26, a low salary topped up with dividends remains the sensible default for most owner-directors.
- Whether you qualify for the Employment Allowance is the biggest swing factor in setting the salary level.
- A salary at or above the Lower Earnings Limit still banks a qualifying year for your state pension.
- Pension contributions, allowable expenses and timing can matter as much as the salary/dividend split.
Why the question matters
If you own and run your own limited company, you get to choose how you take profit out. There are two main routes. Salary goes through PAYE, is deductible from corporation tax, but attracts income tax and NIC. Dividends come out of post-tax profits, so they are not deductible, but they are taxed at lower rates. Most owners use a blend of the two, and the right blend shifts every time HMRC nudges a threshold.
The key 2025/26 numbers
- Personal allowance: £12,570 (frozen)
- Employer's NIC threshold: £5,000 per employee per year, with NIC at 15% above it
- Employee's NIC: 8% above £12,570 up to £50,270, then 2%
- Dividend allowance: £500
- Dividend rates: 8.75% basic, 33.75% higher, 39.35% additional
- Corporation tax: 19% small profits rate up to £50,000, marginal relief to £250,000, then 25%
The standard "low salary, top up with dividends" approach
For most single-director companies, the default is a salary up to the personal allowance (or just enough to bank a qualifying year of NI), then dividends on top. What people wrestle with is where the salary should sit: at the secondary threshold of £5,000, at the personal allowance of £12,570, or somewhere in between.
Set the salary at £12,570 and the company gets corporation tax relief on the full amount. It also pays employer's NIC of 15% on £7,570 (that's £12,570 minus the £5,000 secondary threshold), which comes to £1,135.50. There is no employee's NIC at this level, because the employee's threshold is also £12,570, so the director pays no National Insurance on a salary set there. The real question is whether the corporation-tax relief on the salary outweighs that employer's NIC — and for a profitable company it usually does, because the NIC is itself deductible while dividends are taxed twice.
Employment Allowance, the swing factor
If your company can claim Employment Allowance (currently £10,500), employer's NIC on the salary effectively vanishes, and £12,570 is the obvious place to set it. Single-director companies with no other paid employees cannot claim Employment Allowance. Even so, for a profitable company a salary at the £12,570 personal allowance usually still edges ahead, because the £1,135.50 of employer's NIC is deductible, while leaving that money in the company to pay out as dividends is taxed twice. One important warning: a salary at the £5,000 secondary threshold avoids all National Insurance, but it does not secure a qualifying year towards your state pension. For that you must be paid at least the Lower Earnings Limit (around £6,500 for 2025/26), so if you want a lower salary, set it there rather than at £5,000.
Worked example: sole director, profit of £50,000
Picture a single-director company with £50,000 of pre-extraction profit and no other employees, so no Employment Allowance. Here are two scenarios side by side:
- Salary £5,000, dividends on top: no employer's or employee's NIC on the salary. Corporation tax is paid on £45,000 of profit at 19% = £8,550, leaving £36,450 available as dividends. After the personal and dividend allowances, personal tax is roughly £2,480, so about £38,970 ends up in the director's pocket.
- Salary £12,570, dividends on top: the company pays employer's NIC of £1,135.50, and there is no employee's NIC at this level. Both the salary and that NIC are deductible, so corporation tax is charged on about £36,295 at 19% = £6,896, leaving roughly £29,400 as dividends. Personal tax is about £2,530, so around £39,440 reaches the director.
Here the £12,570 salary comes out roughly £470 ahead, even without Employment Allowance, because the employer's NIC is deductible while the dividend route pays both corporation tax and dividend tax on the same profit. With Employment Allowance the £12,570 route wins by more still, as the employer's NIC disappears. Either way the gap is modest, so cashflow and whether the company is profitable enough to use the corporation-tax relief matter too — but the old rule of thumb that a £5,000 salary is automatically best no longer holds for a profitable one-person company.
Don't forget: pensions, expenses and timing
Salary versus dividends is not the only lever you can pull. Employer pension contributions are corporation-tax deductible and carry no NIC, which makes them one of the most efficient ways to get value out of the company. Beyond that, allowable expenses, electric company cars, the trivial benefits exemption and timing dividends across tax years can each move the dial a little further.
The honest takeaway
There is no single right answer, but for a profitable 2025/26 company a salary at the £12,570 personal allowance is usually the most efficient, whether or not you can claim Employment Allowance. If you would rather keep the salary low, set it at least at the Lower Earnings Limit (around £6,500) so you still bank a qualifying year for your state pension, then top up with dividends to your target income. Either way, pension contributions almost always deserve a look.
We model this for every director client, every year. It takes about ten minutes and routinely saves four-figure sums. If you'd like us to do the same for your company, book a free consultation. We run these numbers for directors across Rochester, Medway and the rest of Kent — see our accountants in Rochester page.
