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.
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, but 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. The director then pays employee's NIC of 8% on that same £7,570, or £605.60. Whether the corporation-tax saving beats the NIC cost hinges on one thing: can you claim Employment Allowance?
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 becomes the obvious place to set it. Here's the catch. Single-director companies with no other paid employees cannot claim Employment Allowance. If that describes you, a salary of £5,000 at the secondary threshold is often the more efficient route. You sidestep employer's NIC entirely and still protect an NI qualifying year through the lower earnings limit.
Worked example: sole director, profit of £60,000
Picture a single-director company with £60,000 of pre-extraction profit and no other employees. Here are the two scenarios side by side:
- Salary £5,000, dividends rest: no employer's or employee's NIC on the salary. Corporation tax is paid on £55,000 of profit at 19% = £10,450. That leaves £44,550 available as dividends. Personal tax (after the personal allowance and dividend allowance) lands around £6,800.
- Salary £12,570, dividends rest: employer's NIC of ~£1,135, employee's NIC of ~£605. Corporation tax on £46,295 of profit at 19% = £8,796. That gives ~£37,499 as dividends. Personal tax is lower because more of the allowance is soaked up by salary, but the NIC cost wipes out most of that saving.
For a single-director company in 2025/26, the £5,000 salary route is usually £200–£600 better. Flip it round: with Employment Allowance available, the £12,570 route wins by a similar margin.
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 2025/26 single-director company with no Employment Allowance, a salary of around £5,000 plus dividends up to your target income is normally the sensible default. Take on other employees and qualify for Employment Allowance, and £12,570 usually wins. 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.