Salary vs dividends for company directors (2025/26)
If you own and run a limited company, you choose how to pay yourself: a salary through PAYE, dividends from post-tax profit, or — almost always best — a mix of both. The optimal split balances National Insurance, corporation tax relief and dividend tax.
Why a mix beats either extreme
Salary and dividends are taxed very differently:
- Salary is a deductible company expense (it reduces corporation tax) but attracts income tax and both employee and employer National Insurance.
- Dividends are paid from profit after corporation tax, so they don't reduce the company's tax, but they carry no NI and are taxed at lower rates (8.75% / 33.75% / 39.35%).
The classic answer is a small salary plus dividends — enough salary to protect your State Pension record and use reliefs, with the balance as dividends.
How much salary should a director take?
Two salary levels dominate the debate for 2025/26:
- £5,000 — the secondary threshold: below this, the company pays no employer NI, but you don't fully use the personal allowance against salary.
- £12,570 — the personal allowance: a higher salary means more corporation-tax relief, but the company pays 15% employer NI on pay above £5,000.
For most single-director companies, a £12,570 salary still wins narrowly because corporation tax relief at 19–26.5% outweighs the 15% employer NI. Companies that can claim the Employment Allowance (which a sole director cannot) favour £12,570 even more clearly.
£60,000 profit
With £60,000 profit, paying a £12,570 salary leaves about £45,000 of company profit, taxed at corporation tax, then drawn as dividends. After the £500 dividend allowance, basic-rate dividends are taxed at 8.75% and higher-rate at 33.75%. Running the numbers, the £12,570-salary route typically leaves a few hundred pounds more than the £5,000 route — small but free money once your payroll is set up.
Protect your State Pension
Dividend rules you must follow
Dividends can only be paid from retained, post-tax profit. You must have enough distributable reserves, hold a board meeting (even a one-person one), and keep dividend vouchers. Paying dividends the company can't support creates an "illegal dividend" that HMRC or a liquidator can claw back.
Common salary/dividend mistakes
- Taking all salary or all dividends. A blend almost always beats either extreme once NI and corporation tax relief are weighed.
- Setting salary below the Lower Earnings Limit. Drop below £6,396 and you may miss a qualifying year for the State Pension.
- Paying dividends with no distributable profit. Illegal dividends can be reclaimed and create personal tax problems.
- Forgetting the £500 dividend allowance shrank. The dividend allowance is now just £500, so most dividends are taxable from the first few hundred pounds.