If you’re a limited company director, one of the best ways to legally reduce your tax liability is through the strategic use of salary and dividends. In the 2025/26 tax year, it’s more important than ever to understand the optimal balance between the two, especially as tax allowances and thresholds continue to evolve.
Let’s explore what the most tax-efficient split looks like this year — and how you can maximise your take-home pay while minimising unnecessary tax and National Insurance (NI).
Why Split Income Between Salary and Dividends?
As a director and shareholder of your limited company, you can choose how to pay yourself — through a salary, dividends, or a combination of both.
Salary is subject to Income Tax and both employer and employee National Insurance contributions.
Dividends are taxed differently — often at lower rates — and no NI is payable.
Using both methods smartly can help you:
Qualify for state pension and benefits (via salary)
Reduce corporation tax (salary is a deductible expense)
Minimise Income Tax and NI (via dividends)
The 2025/26 Tax-Free Allowances You Need to Know
Before planning your split, it’s important to understand the key thresholds:
Personal Allowance: £12,570 – tax-free income
Lower Earnings Limit (LEL) for NI: £6,396 – keeps your NI record active
Primary Threshold (NI): £12,570 – earnings above this attract employee NI
Employer NI Threshold: £9,100
Dividend Allowance: £500 (down from £1,000 in 2023/24)
The Most Tax-Efficient Salary for Directors (2025/26)
For most directors who have no other income and can claim the Employment Allowance, the optimal salary is:
£12,570 per year (or £1,047.50/month)
This keeps your income within the personal allowance and below the NI thresholds, meaning:
No Income Tax
No Employee NI
No Employer NI (if you qualify for Employment Allowance)
If your company cannot claim the Employment Allowance (e.g. you’re the sole director and the only employee), the ideal salary may drop to around £9,100 to avoid employer NI altogether.
The Rest as Dividends
Once your salary is set, any remaining profits after corporation tax can be paid as dividends.
Dividends are taxed at the following rates in 2025/26:
0% on the first £500 (dividend allowance)
8.75% for basic rate taxpayers (up to £50,270 total income)
33.75% for higher rate taxpayers
39.35% for additional rate taxpayers
So if you take:
£12,570 salary (tax-free)
Up to £37,200 in dividends, your total income remains within the basic rate band, with relatively low tax overall.
On this setup, you could extract around £49,770 total from your company and pay less than £3,000 in dividend tax — while keeping your NI liability at zero.
Summary
| Component | Amount | Tax / NI |
|---|---|---|
| Salary | £12,570 | 0% |
| Dividends | £37,200 | ~£2,900 tax |
| Total | £49,770 | ~6% total tax |
Final Thoughts
The best strategy in 2025/26 is still to take a modest salary (up to the personal allowance) and pay the rest through dividends. This keeps you tax-efficient, compliant with HMRC rules, and qualifies you for state pension credits.
But remember — every situation is unique. If you have other income, employees, or use other reliefs (like pension contributions), it’s wise to get tailored advice from an accountant or tax adviser.
Need help visualising it? Use the TaxGrid Calculator to model your ideal director pay split.