What’s the Most Tax Efficient Director’s Salary?
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How Limited Company Directors Can Pay Themselves Tax-Efficiently
If you’re a UK limited company director, one of your key financial decisions each tax year is how to pay yourself in the most tax-efficient way. Balancing salary and dividends properly can save thousands in unnecessary tax, reduce National Insurance obligations, and ensure full HMRC compliance.
This guide explains how to structure your remuneration as a director, including optimal salary levels, how dividends interact with Corporation Tax, and how to make the most of your personal allowance.
Understanding How Directors Get Paid
Directors of limited companies typically receive income in two ways:
- Salary – taxed under PAYE, subject to Income Tax and National Insurance.
- Dividends – paid from post-tax company profits, with separate dividend tax rates.
Combining these two effectively can minimise your overall tax burden while ensuring compliance with employment and corporate law.
Salary vs Dividends: Key Differences
| Aspect | Salary | Dividends |
|---|---|---|
| Tax treatment | Deductible business expense before Corporation Tax | Paid from post-tax profits |
| Subject to NICs? | Yes (employee and employer) | No National Insurance |
| Affects state pension entitlement? | Yes | No |
| Reported to HMRC | Through payroll (RTI) | Via company’s accounts and personal Self Assessment |
| Flexibility | Regular or variable | Must be from retained profits |
The Optimal Director’s Salary for 2025/26
The most tax-efficient director’s salary depends on whether the company is eligible for the Employment Allowance (EA) and the director’s other income sources.
1. If the Company Cannot Claim Employment Allowance (Typical for sole directors)
Recommended salary: £9,100 per year (£758.33 per month)
This is set at the Secondary Threshold for National Insurance.
At this level:
No employee or employer NIC is due.
The salary is still a deductible expense, reducing Corporation Tax (currently 25% for most companies).
The director earns qualifying years for State Pension and benefits.
Outcome: Tax-efficient, compliant, and fully utilises the personal allowance without triggering NICs.
2. If the Company Can Claim Employment Allowance
Recommended salary: £12,570 per year (equal to the personal allowance).
EA offsets the employer’s NIC, meaning you can pay yourself a higher salary with minimal tax cost.
Ensures full use of the Personal Allowance and slightly increases Corporation Tax savings.
Outcome: Slightly higher net benefit due to more salary being tax-free, as the EA covers NIC obligations.
Dividends: Maximising Post-Tax Income
Once a tax-efficient salary is taken, additional remuneration is typically drawn as dividends from post-tax company profits.
Dividend tax rates for 2025/26:
| Income Band | Dividend Tax Rate |
|---|---|
| Dividend Allowance (first £500) | 0% |
| Basic Rate | 8.75% |
| Higher Rate | 33.75% |
| Additional Rate | 39.35% |
Example: Director with £9,100 salary and £40,000 dividends
| Component | Amount | Tax Treatment |
|---|---|---|
| Salary | £9,100 | No tax or NIC; uses part of personal allowance |
| Dividends | £40,000 | Approx. £30,670 taxed at 8.75% after allowances |
| Total tax due | Approx. £2,684 dividend tax | Effective rate: ~6.7% overall |
Key point: Dividends are not deductible for Corporation Tax but are still well below equivalent PAYE tax rates at moderate income levels.
How Corporation Tax Interacts with Salary and Dividends
- Salary reduces Corporation Tax because it’s a business expense.
- Dividends are paid after Corporation Tax has been applied.
Hence, paying a small salary and larger dividends often maximises take-home income. For 2025/26, with Corporation Tax rates up to 25%, the small salary approach remains efficient.
National Insurance Overview
Key thresholds (2025/26):
| Type | Annual Threshold | Rate |
|---|---|---|
| Employee NIC (Primary) | £12,570 | 8% (main rate) |
| Employer NIC (Secondary) | £9,100 | 13.8% |
| Lower Earnings Limit | £6,396 | – |
- Paying a salary above £6,396 earns qualifying years for state pension.
- Staying below £9,100 avoids employer NIC obligations if no EA.
- EA (£5,000) can be used when at least one employee is paid via PAYE.
Common Salary and Dividend Mistakes
- Paying salary below £6,396 – loses state benefit entitlement.
- Ignoring Employment Allowance rules – not all companies qualify.
- Taking dividends without profit – illegal, considered a director’s loan.
- Missing payroll submissions (RTI) – HMRC penalties apply even for £0 PAYE.
- Overdrawing director’s loan account – creates tax complications and benefit-in-kind charges.
Frequently Asked Questions (FAQs)
What’s the most tax-efficient salary for a sole director in 2025/26?
£9,100 per year – this avoids NIC, keeps Corporation Tax relief, and preserves state pension eligibility.
Can directors pay themselves only dividends?
No – directors must register a salary through PAYE if they perform work. Dividends can only come from retained profits.
Is it better to take a higher salary for pension contributions?
Yes, if you’re building salary-based pensions. Employer pension contributions can be another tax-efficient extraction method (fully deductible for Corporation Tax).
How often should I pay dividends?
There’s no set frequency, but ensure proper board minutes and dividend vouchers are kept for HMRC compliance.
Can I change my remuneration strategy mid-year?
Yes, but always ensure consistent treatment and full documentation to avoid HMRC queries.
Best Practice Conclusion
For the 2025/26 UK tax year, the most tax-efficient director’s salary approach generally is:
- Sole director companies: Salary of £9,100 + dividends from available profits.
- Companies eligible for Employment Allowance: Salary of £12,570 + dividends.
- Maintain accurate records, ensure dividends are from retained profits, and plan distributions around your personal tax bands.
This balanced strategy leverages Corporation Tax deduction, National Insurance savings, and dividend allowances – helping directors maximise income while staying fully compliant with HMRC.
