If you run your own limited company, you’ve probably wondered:
“What’s the most tax-efficient way to pay myself salary, dividends, or a mix of both?”
It’s one of the most common questions UK directors ask each year.
And in 2025/26, the answer has evolved because National Insurance and Corporation Tax rates have changed again, and the dividend allowance has halved.
This guide breaks it all down clearly so you can pay yourself confidently, understand what’s really efficient, and plan your cashflow accordingly.
1. How Directors Can Pay Themselves
As a limited-company director, you wear two hats:
- Employee (salary via PAYE) — counts as a business expense and reduces your Corporation Tax bill.
- Shareholder (dividends) — drawn from post-tax profit (after Corporation Tax has already been paid).
Most directors use both because:
- A small salary builds NI credits and State Pension entitlement.
- Dividends avoid NIC altogether and are taxed more lightly.
- The blend usually minimises total tax while keeping you compliant.
💡 Employer NI costs can add up quickly see our breakdown of Payroll Costs & Employer NIC Explained to understand how rates impact your company in 2025/26.
2. The Two Main Ways to Pay Yourself
| Method | Tax Treatment | Pros | Cons |
|---|---|---|---|
| Salary | Subject to Income Tax and National Insurance | Builds pension and benefit entitlement; reduces Corporation Tax | Increases company PAYE and NIC costs |
| Dividends | Paid from post-tax profit (after Corporation Tax) | Lower tax rates and no NI | Can only be paid from retained profits |
3. What’s Changed in 2025/26 (and Why It Matters)
Every April, HMRC tweaks the numbers but 2025/26 brings some meaningful shifts that affect how directors pay themselves.
| Area | 2024/25 | 2025/26 | What This Means |
|---|---|---|---|
| Employer NIC rate | 13.8 % | 15 % | Higher cost on salary above threshold. |
| Employer NI threshold | £9,100 | £5,000 | You start paying Employer NI earlier. |
| Dividend allowance | £1,000 | £500 | Less dividend income is tax-free. |
| Corporation Tax (main) | 25 % | 25 % (unchanged) | More small companies now hit this rate as marginal-relief bands tighten — see Corporation Tax Explained for SMEs (and Marginal Relief). |
| Personal Allowance | £12,570 | £12,570 (unchanged) | Frozen allowance means a smaller real-term benefit. |
In short:
- Companies pay more Employer NIC on salaries.
- Shareholders pay more Dividend Tax.
- Corporation Tax stays high at 25 %.
If you’re still using your 2024/25 setup, expect your 2025/26 take-home to dip unless you adjust.
4. How the Two Layers of Tax Work (in Plain English)
Here’s where many directors get confused:
Dividends are paid after Corporation Tax.
So before you even see the money, the company has already paid its first round of tax.
Let’s break it down with a simple example.
Step-by-Step Example
1️⃣ Company profit (before tax): £100,000
2️⃣ Corporation Tax (25 %) = £25,000 → paid by the company
3️⃣ Profit after tax: £75,000 → available for dividends
4️⃣ You take £75,000 as dividends
Here’s how personal Dividend Tax applies in 2025/26:
(see detailed bands in Dividend Tax 2025/26: How Much Will You Pay?)
| Band | Rate | Portion taxed | Tax due |
|---|---|---|---|
| Dividend allowance | 0 % | £ 500 | £ 0 |
| Basic rate | 8.75 % | £ 37,700 | £ 3,298 |
| Higher rate | 33.75 % | £ 36,800 | £ 12,420 |
| Total Dividend Tax | — | — | £ 15,718 |
5️⃣ Combine both layers:
| Level | Tax Type | Amount | Who Pays |
|---|---|---|---|
| 1️⃣ | Corporation Tax (25 %) | £ 25,000 | Company |
| 2️⃣ | Dividend Tax | £ 15,718 | You |
| Total Tax on £100 k profit | — | £ 40,718 (≈ 41 %) | — |
➡️ You personally keep about £59,000 from that £100,000 profit.
💡 Every £1 you withdraw as a dividend has already lost 25p in Corporation Tax before personal tax applies that’s why dividends are efficient, but never “tax-free.”
5. Salary vs Dividends 2025/26 Including NIC
When comparing pay methods, it’s vital to include both Income Tax and National Insurance Contributions (NICs) they’re a real cost to both you and the company.
| Scenario | Total Tax (All Levels) | Effective Rate | Notes |
|---|---|---|---|
| All salary (£100 k gross) | ≈ £47,200 | ≈ 47 % | Includes ~£27k Income Tax + ~£9.2k Employee NIC + ~£11k Employer NIC (15 %) → total cost to company ≈ £111k. |
| All dividends (£100 k profit) | ≈ £40,700 | ≈ 41 % | 25 % Corporation Tax + personal Dividend Tax at 8.75 % / 33.75 %. |
| Balanced mix (£12,570 salary + £75 k dividends) | ≈ £31–33 k | ≈ 31–33 % | Uses full Personal Allowance, keeps Employer NIC minimal (~£525), and maximises dividend efficiency. |
💡 Why the blend wins: a small salary keeps your NI record active and reduces Corporation Tax, while dividends avoid NI altogether.
For more context on how NIC impacts cashflow, see Payroll Costs & Employer NIC Explained.
6. When You Pay Each Tax
| Tax | Who Pays | When Due | How |
|---|---|---|---|
| Income Tax / NIC (salary) | You + Company | Monthly | PAYE submission |
| Corporation Tax | Company | 9 months + 1 day after year-end | HMRC portal |
| Dividend Tax | You | 31 Jan 2027 (for 2025/26 year) | Self-Assessment |
7. Other Efficient Options
Employer Pension Contributions
- Reduce Corporation Tax liability.
- Not subject to Income Tax or NIC.
- Annual allowance £60,000 (with carry-forward options).
Reimbursed Business Expenses
- Allowable costs reduce profit (and Corporation Tax).
- Keep receipts and use a separate business account.
→ See our DIY Bookkeeping Checklist for Directors (UK 2025/26)
8. When to Revisit Your Pay Mix
You should review your setup if:
- You’ve taken on staff (Employer NI now higher)
- You own multiple companies (CT bands split)
- Your income exceeds £50,270 or £125,140 (threshold shift)
For help calculating exact CT across companies, read Corporation Tax & Marginal Relief Explained.
9. FAQs
Q1. Are dividends taxed twice?
Yes — first as Corporation Tax on company profits, then again as personal Dividend Tax. The combined rate shows your true liability.
Q2. What’s the most tax-efficient director salary for 2025/26?
Usually £12,570, as it uses your Personal Allowance and secures NI credits without triggering Income Tax.
Q3. When do I pay tax on dividends?
Through Self-Assessment by 31 January 2027 (for the 2025/26 tax year).
Q4. Do I need PAYE if I’m the only director?
Yes, a PAYE scheme is still required for any salary payments above the NI threshold.
Q5. What if I run multiple companies?
Corporation Tax bands and marginal-relief limits split across associated companies, seek advice before dividing profits.
10. The Bottom Line
There’s no single “magic” ratio between salary and dividends.
But understanding both layers of tax Company and Personal gives you control and confidence.
For most directors in 2025/26:
- Take a modest salary (~£12,570)
- Draw dividends from post-tax profits
- Re-check your mix annually as rates change
Still Confused? Here is a Directors Pay excel guide for UK 25/26
simply input your Salary package (Salary-Dividends-Interest/Pension)
It will calculate your: Income Tax, National Insurance, Student loan repayment, Dividend tax, National Insurance Contribution and Corporation Tax.
and if that wasn’t enough, it will tell you when each of the tax payment deadline hits, all you need to tell is if you are paid through PAYE or just with your Self-Assessment, and when your LTD company year end is.
💬 Book a 15-Minute Clarity Call
Get personalised guidance on your 2025/26 director-pay mix explained in plain English.
Book your free call with Heights Accountancy →