For UK company directors, how you pay yourself through salary, dividends, or a mix of both can affect your take-home pay and tax bill. With new rules kicking in from April 2025, here’s the lowdown on salary vs dividends 2025 and what works best for the 2025/26 tax year.
1. Salary in 2025/26
Taking a salary comes with important perks:
- Counts towards your State Pension & benefits
- Reduces corporation tax as a business expense
- Helps with mortgage & loan applications through regular PAYE income
Tax-efficient salary level:
- Around £12,570 per year (Primary Threshold)
- Enough to get National Insurance credits without paying employee NI
National Insurance contributions:
- Employee NI: 8% above £12,570
- Employer NI: 15% on earnings above £5,000 (new lower threshold)
Employment Allowance:
- Increased to £10,500 for 2025/26
- Eligibility rules relaxed so that more employers can claim
2️. Dividends in 2025/26
Dividends are paid from post-tax profits and are not subject to National Insurance.
Dividend tax rates:
- Basic rate: 8.75%
- Higher rate: 33.75%
- Additional rate: 39.35%
Dividend Allowance:
- Dropped to just £500 – most dividends are now taxable
Why choose dividends?
- More tax-efficient than a salary above certain income levels
- No National Insurance contributions are payable
3️. What’s the Smartest way to pay yourself?
If you’re wondering how to balance salary vs dividends in 2025, for many small company owners, a simple approach works best:
Take a low salary (£12,570 per year) to use your personal allowance fully. Then pay the rest as dividends up to the basic rate limit (£50,270 total income)
If your income is higher, consider:
- Pension contributions to reduce taxable income
- Income splitting with spouse/family members in lower tax bands
- Timing dividend payments carefully
- Ensuring IR35 compliance if you’re a contractor
4️. Watch Out for
- Dividends must come from available company profits. No profits, no dividends!
- Keep proper paperwork – board minutes & dividend vouchers
- HMRC is increasingly cracking down on aggressive tax planning, especially with contractors and personal service companies (PSCs)
Need Personal Advice?
Tax rules change often and can be complex. For help finding the most tax-efficient way to pay yourself in 2025/26, get in touch. We’ll tailor the advice and run the numbers based on your specific situation.
