Tax-Efficient Director Salaries and Dividends: 2025/26
Chrissy Leach • 10 March 2025
As a director of a limited company in the UK, determining a tax-efficient strategy for remunerating yourself through salary and dividends is crucial for optimising your personal income and minimising tax liabilities.
Rates and Thresholds for 2025/26
Most of the tax rates and thresholds for 2025/26 are the same as for 2024/25 with a couple of changes:
- National Insurance Lower Earnings Limit increased to £6,500 – if you have earnings above this then the year counts towards state benefits including state pension
- National Insurance Secondary Threshold reduced to £5,000 – this is the point where your limited company begins paying national insurance
- Employers National Insurance rate increased to 15% – your limited company will pay 15% of your salary above £5,000 in employers NI (the employers national insurance rate for benefits in kind is also increased to 15%)
- Employment Allowance increased to £10,500 – this allows eligible employers to reduce their employers NI liability by up to £10,500
Considerations:
- National Insurance Contributions - a salary above £6,500 ensures you receive a qualifying year for state pension purposes.
- Company Profitability - dividends can only be paid from distributable profits. Ensure your company has sufficient profits before declaring dividends.
- Employment Allowance Eligibility - generally, companies with more than one employee or those paying NI on employees' earnings may qualify. Single-director companies without additional employees do not qualify.
- Tax-Free Childcare – there are income requirements to qualify for this
- Pension Contributions – you can only make personal pension contributions up to your UK relevant earnings (up to the annual allowance) so if your salary is low, your tax-efficient pension contributions will also be low. However, employer pension contributions are only restricted to the annual allowance, not your UK relevant earnings.
Recommended Salary and Dividend Strategy
A common tax-efficient approach involves drawing a combination of salary and dividends. This method leverages the personal allowance and typically results in lower NI contributions.
The level that’s most tax-efficient for you will be dependent on your personal and company circumstances.
Contact us to discuss the best solution for you and your business.
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