Most tax effective director’s salary and dividends for 2025/26
This article discusses the most tax effective director’s salary and dividends for 2025/26. This has been calculated using the changes proposed in the chancellor’s 2024 Autumn Budget for the new tax year.
This post is aimed at directors and shareholders of small, limited companies. If you're looking for the relevant details for the current tax year (2024/25) you can find the information here.
Tax rates and allowances for the 2025/26 tax year
Below is the position for taxpayers in England, Northern Ireland and Wales for the new tax year starting on 6th April 2025:
We have not included the 2025/26 income tax rates for Scottish taxpayers in this article.
Introduction - Most tax effective director's salary and dividends for 2025/26
For the majority of directors who are shareholders in their own company, taking a nominal salary and extracting the balance as dividends continues to be the most tax efficient method of extracting their limited company profits.
Most importantly, there are a number of advantages to using this form of profit extraction from your company:
The most tax effective director's salary and dividends for 2025/26
When calculating the most tax effective director’s salary and dividends for 2025/26 we've assumed the following:
Option 1
The first option assumes you can't claim the NI employment allowance because you are the only one employed by your company. Where this applies paying a salary up to the reduced Employer’s National Insurance Threshold of £5,000 is appropriate.
For the 2025/26 tax year this will be £416.66 a month or £5,000 per annum. This threshold is lower than the Employee's National Insurance threshold which amounts to £12.570 per annum.
Because of this change, dividends of £45,270 are paid without any higher rate tax (the basic rate band of £50,270 less salary of £5,000).
Therefore, taking this amount as dividends, you'll have a tax liability of £3,255 detailed below:
Option 2
This second option is preferable if you are eligible to claim the NI employment allowance. This increases to £10,500 from 6 April 2025.
This might be relevant where you have another employee or a family member working in your business.
Paying a salary of up to £12,570 per annum or £1,047.50 per month means you are able to pay dividends of £37.700 up to the basic rate band.
As a result paying dividends of £37,700, results in exactly the same personal income tax liability of £3,255 shown above. It is calculated as follows:
So the ability to pay the higher salary of £12,570 means a greater corporation tax saving. Potentially this could be in excess of £1,800.
This is because salaries are a tax-deductible expense for the company. Whereas dividends are not. This is more attractive because the maximum corporation tax rate is now 25%.
Alternative ways of extracting profits from your company
There is no ideal solution so you could consider some of the following approaches:
Summary
There appears to be no difference in personal income tax liability regardless of what combination of salary or dividends you take up to the basic rate band.
However, where you are able to claim the NI Employment Allowance there is a significant tax saving overall. As a result, single director companies will be worse off because of the changes in the Autumn Budget.
Therefore, if you’re the only one working for your company, there’s a tax advantage in employing a family member before the start of the new tax year.
For more useful information, check out our Ebooks here.
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