If you run a UK limited company, one of the most important financial decisions you'll make is how to pay yourself. The salary-plus-dividends structure remains the most tax-efficient approach for most directors in 2025/26 — but the optimal split has shifted again after recent tax changes.
Why Not Just Take a Salary?
Taking all your income as salary means paying both income tax and National Insurance on everything. At £50,000, a PAYE employee pays around £11,600 in combined tax and NI. The company also pays 15% employer NI on top.
Dividends, by contrast, are not subject to National Insurance at all. And dividend tax rates are lower than income tax rates at every band. This double advantage is why the salary-plus-dividends structure exists.
The Optimal Salary for 2025/26
Most accountants now recommend one of two salary levels:
Option A: £12,570 salary — Uses the full personal allowance. No income tax. Employee NI kicks in but is modest. Employer NI applies above £5,000 threshold (costing the company ~£1,136). This is the most common recommendation.
Option B: £5,000 salary — Stays below the employer NI threshold, saving the company £1,136. But you lose £7,570 of personal allowance that could have sheltered income from tax. Only worth it if you have other income using the allowance.
For most single-director companies with no other income, £12,570 is the sweet spot. The small amount of employer NI you pay is more than offset by the tax-free salary that would otherwise be taxed as dividends.
Dividend Tax Rates 2025/26
Once you've taken your optimal salary, the rest comes as dividends. Here's what you'll pay:
| Band | Dividend Rate | Equivalent Income Tax Rate |
|---|---|---|
| Dividend Allowance (first £500) | 0% | — |
| Basic Rate (up to £50,270 total income) | 8.75% | 20% |
| Higher Rate (£50,271–£125,140) | 33.75% | 40% |
| Additional Rate (above £125,140) | 39.35% | 45% |
The savings are significant: basic-rate dividends are taxed at 8.75% versus 20% + 8% NI on salary. That's a combined saving of 19.25 percentage points on every pound in the basic rate band.
Worked Example: £60,000 Total Income
| All Salary | £12,570 Salary + Dividends | |
|---|---|---|
| Gross Income | £60,000 | £60,000 |
| Income Tax | £11,432 | £5,471 |
| Employee NI | £3,194 | £0 |
| Dividend Tax | £0 | £3,697 |
| Employer NI (company cost) | £8,250 | £1,136 |
| Corporation Tax on dividends* | £0 | £9,019 |
| Total Tax Paid | £22,876 | £19,323 |
*Dividends are paid from post-corporation-tax profits, so the company pays 19% CT before you take them. Even accounting for this double layer of tax, the salary-plus-dividends approach saves £3,553 per year in this example.
The Dividend Allowance Shrinkage
The tax-free dividend allowance has been slashed repeatedly: £5,000 in 2017/18, then £2,000, then £1,000, and now just £500 for 2025/26. At basic rate, this costs directors an extra £44 per year versus the £2,000 allowance — irritating but not life-changing. At higher rate, the impact is more noticeable.
Don't Forget Corporation Tax
Before you can take dividends, your company needs to pay corporation tax on its profits. The rates for 2025/26 are 19% for profits up to £50,000, rising to 25% for profits above £250,000, with marginal relief in between. This is effectively a "first layer" of tax on dividends that salary doesn't face.
The combined effective rate (corporation tax + dividend tax) is still lower than salary tax + NI for most directors, but the gap narrows at higher income levels. Above approximately £125,000, the maths becomes more nuanced and you should consult an accountant.
The £100,000 Trap: Losing Your Personal Allowance
One of the most punishing features of the UK tax system is the withdrawal of the personal allowance for income between £100,000 and £125,140. For every £2 you earn above £100,000, you lose £1 of personal allowance. This creates an effective marginal tax rate of 60% on income in this band — whether it comes from salary or dividends.
For directors taking dividends, the effective rate in this trap is even more painful when you factor in corporation tax already paid. If your total income (salary plus dividends) is heading above £100,000, you have a few planning options: make pension contributions to bring taxable income below £100,000, delay dividend extraction to a future tax year, or accept the hit if the cash flow is needed. Pension contributions are particularly effective here because they extend your basic rate band and restore the personal allowance.
For instance, if your total income would be £110,000, a £10,000 pension contribution brings you back to £100,000 and effectively saves you 60% on that £10,000 — worth £6,000. That pension contribution only cost you £4,000 in real terms.
Timing Your Dividends
Unlike salary, which must be paid regularly and reported through PAYE in real time, dividends offer flexibility in timing. You can declare dividends at any point during the financial year, and you can choose whether to declare interim dividends throughout the year or a single final dividend after the year-end accounts are prepared.
This flexibility creates planning opportunities. If you know you'll have a lower-income year (perhaps due to maternity leave, a sabbatical, or a gap between contracts), you can time dividend extraction to fall in the tax year where your total income is lower. Similarly, if you're approaching the higher rate threshold, you might delay a dividend by a few weeks to push it into the next tax year.
To be valid, every dividend must be supported by a board minute (or written resolution for single-director companies) and the company must have sufficient distributable reserves — meaning retained profits after corporation tax. You cannot declare dividends from future expected profits. If you overdraw dividends, HMRC may reclassify them as salary or a director's loan, creating additional tax charges and potentially benefit-in-kind liabilities.
Dividends and Child Benefit
The High Income Child Benefit Charge (HICBC) kicks in when either parent's adjusted net income exceeds £60,000. Between £60,000 and £80,000, you repay an increasing percentage of Child Benefit — at £80,000 or above, the full amount is clawed back.
Dividends count as income for HICBC purposes, so the salary-plus-dividends structure doesn't help you avoid this charge. However, pension contributions reduce your adjusted net income and can bring you below the threshold. If you receive Child Benefit and your total income is close to £60,000–£80,000, it's worth modelling the interaction between dividend extraction, pension contributions, and the HICBC taper using our Dividend Tax calculator.
Retained Profits vs Taking It All Out
Not every pound of profit needs to come out of the company immediately. Corporation tax at 19–25% is lower than the combined tax on extracting dividends, so leaving profits in the company can be a deliberate strategy — especially if you're building cash reserves for investment, equipment purchases, or a future property acquisition.
However, there's a balance to strike. Retaining too much cash in a trading company can create problems if HMRC considers the company to be an investment company rather than a trading company, which affects Entrepreneurs' Relief (now Business Asset Disposal Relief) eligibility on a future sale. There's no specific threshold, but accountants generally advise keeping retained cash proportionate to the company's trading needs.
The other consideration is opportunity cost. Money sitting in a business current account earns minimal interest. If you extract it and invest personally (in an ISA, pension, or property), the after-tax returns may be better than the corporation tax saving from keeping it locked in.
When the Salary-Plus-Dividends Structure Doesn't Work
This approach isn't optimal for everyone. If you're an employee of another company earning above the personal allowance, a salary from your own company creates additional NI costs with no personal allowance benefit. In that case, a minimal salary (or none at all) plus dividends may be better.
Similarly, if you're claiming certain state benefits, the interaction between salary, dividends, and benefit calculations can be complex. Universal Credit treats dividends differently to earned income, and the taper rate calculations matter. If you're in this situation, a specialist accountant can model the true impact.
Directors with multiple shareholders also face constraints. Dividends must be paid proportionally to shareholding (unless you have different share classes). If your spouse holds shares, their personal tax situation affects the overall efficiency of the split. Alphabet shares can give you more flexibility, but HMRC scrutinises settlements legislation if the arrangement lacks commercial substance.
Calculate Your Dividend Tax
Enter your salary and dividend amounts to see the exact tax breakdown.
Dividend Tax Calculator →Key Takeaways
For 2025/26, the playbook for most limited company directors is: take a salary of £12,570 to use your personal allowance, then draw the rest as dividends up to the basic rate limit. If you need more than ~£37,700 in dividends, you'll start paying 33.75% on the excess — still better than salary, but the advantage shrinks.
Use our Dividend Tax calculator to model different salary/dividend splits, and always work with a qualified accountant for decisions specific to your company's situation.