Published by Westridge Accountants | Quality, Affordability & Convenience
One of the most common questions we hear from limited company directors is: “What’s the most tax-efficient way to pay myself?” The answer almost always involves a combination of salary and dividends — but getting the balance right can save you thousands of pounds each year.
Why Most Directors Take a Low Salary and Top Up With Dividends
When you operate through a limited company, your company pays Corporation Tax on its profits. What’s left can be distributed to shareholders as dividends. As a director-shareholder, you control how much you take as salary (through PAYE) and how much as dividends.
- Salary is subject to Income Tax and National Insurance (both employee’s and employer’s)
- Dividends are subject to Dividend Tax only — at lower rates than Income Tax
- Employer’s NI (currently 15%) is a cost to your company, reducing available profit
By keeping salary low and taking more in dividends, you can significantly reduce the total tax and NI paid — both personally and through the company.
The Optimal Salary Level for 2025/26
Option 1: £12,570 (Personal Allowance)
Taking a salary equal to the Personal Allowance means you pay no Income Tax on your salary. You will pay a small amount of employee and employer National Insurance above £9,100 per year — but your company can deduct this NI as a business expense.
Option 2: £9,100 (Secondary Threshold)
Taking salary at exactly the Secondary Threshold means no NI is due at all — by either you or the company. You still retain your State Pension entitlement because your earnings are above the Lower Earnings Limit (£6,500).
The best choice depends on your specific situation. At Westridge Accountants, we recommend reviewing this with your accountant each April as rates change.
Dividend Tax Rates for 2025/26
Every individual has a Dividend Allowance of £500 (2025/26) — dividends up to this amount are tax-free. Above the allowance, dividends are taxed at:
| Tax Band | Income Range | Dividend Tax Rate |
|---|---|---|
| Basic rate | Up to £50,270 | 8.75% |
| Higher rate | £50,271 – £125,140 | 33.75% |
| Additional rate | Over £125,140 | 39.35% |
Compare these to equivalent Income Tax rates (20%, 40%, 45%) — dividends are taxed at significantly lower rates in every band.
A Worked Example
Let’s say you want to take home £50,000 in 2025/26 as a sole director.
Approach: £12,570 salary + £37,430 dividends
- Salary covered by Personal Allowance — no Income Tax
- Small NI on salary above £9,100
- First £500 of dividends — tax-free
- Remaining £36,930 dividends at 8.75% = approximately £3,231
Total personal tax: roughly £3,231 — compared to a sole trader on the same profit paying approximately £9,725 in Income Tax and NI. The saving can be over £6,000 per year.
These are illustrative figures only. Your actual position will depend on other income, allowances, and company circumstances.
Important Rules to Get Right
Dividends must be paid from profits. You can only pay dividends from retained profits. If your company has not made a profit, paying dividends is unlawful — HMRC may treat the payments as salary and charge NI retrospectively.
You must issue dividend vouchers. Every time a dividend is paid, the company must produce a dividend voucher recording the date, amount, and recipient.
Corporation Tax comes first. Dividends are paid from post-tax company profit. Ensure Corporation Tax has been accounted for before calculating profit available to distribute.
Director’s Loan Account. If you take money beyond your salary and declared dividends, it’s treated as a director’s loan. Loans above £10,000 not repaid within 9 months of year end trigger an S455 tax charge at 33.75%.
What About Pension Contributions?
Employer pension contributions made directly from the company are deductible against Corporation Tax, not subject to Income Tax or NI, and within the annual allowance of £60,000 for 2025/26. For many directors, combining a modest salary, dividends, and pension contributions delivers the best overall outcome.
How Westridge Accountants Can Help
Getting your director pay structure right requires proper planning. At Westridge Accountants, we review your salary and dividend structure every year, prepare payroll and dividend documentation, file your personal Self Assessment return including dividends, and advise on pension and other tax-efficient strategies. Our fees are fixed and transparent.
Want to make sure you’re paying yourself in the most tax-efficient way? Contact us at info@westridgeaccountants.co.uk or visit www.westridgeaccountants.co.uk. We’re available 7 days a week, 8am to 10pm.
This article is for general guidance only and does not constitute personalised tax advice. Tax rules can change and individual circumstances vary. Please contact Westridge Accountants for advice tailored to your specific situation. Westridge Accountants Ltd is regulated by AAT and supervised by AAT for Anti-Money Laundering purposes.
Frequently Asked Questions
What is the most tax-efficient director salary in 2025/26?
Most accountants recommend either £9,100 (the Secondary Threshold — no National Insurance due) or £12,570 (the Personal Allowance — no Income Tax due). The right choice depends on your other income, company circumstances, and pension planning. We review this with all our clients every April.
Can I pay myself dividends if my company is making a loss?
No. Dividends can only be paid from retained profits after Corporation Tax. Paying dividends when there are insufficient profits is unlawful — HMRC may reclassify the payments as salary and charge National Insurance retrospectively.
Do I need to complete a Self Assessment tax return if I take dividends?
Yes. Dividends above the £500 annual Dividend Allowance must be declared via Self Assessment, even if you are already registered for PAYE as a director. The online filing deadline is 31 January.
What is a director’s loan account and why does it matter?
A director’s loan account records money you take from the company beyond your salary and declared dividends. If the balance exceeds £10,000 and isn’t repaid within 9 months of your company’s year end, your company faces an S455 tax charge of 33.75% — one of the most common tax traps for directors.
Can my limited company make pension contributions on my behalf?
Yes. Employer pension contributions paid directly from the company are deductible against Corporation Tax, are not subject to Income Tax or National Insurance, and don’t count as a benefit in kind. The annual allowance for 2025/26 is £60,000 (or 100% of salary, whichever is lower).
Need advice on director salaries and dividends? Our company accounts team in Hayes can help you structure your pay tax-efficiently.
