As a director and shareholder of a UK limited company, it’s essential to optimise your remuneration strategy to minimize tax liabilities and National Insurance Contributions (NICs). For the 2025/26 tax year, combining a salary with dividends remains an effective approach. Here’s how you can structure your income:

Tax Rates and Allowances for 2025/26

Personal Allowance: £12,570 – Income up to this amount is tax-free.

Dividend Allowance: £500 – The first £500 of dividend income is tax-free.

Income Tax Bands:

Basic Rate: £12,571 to £50,270 – taxed at 20%

Higher Rate: £50,271 to £125,140 – taxed at 40%

Additional Rate: Over £125,140 – taxed at 45%

Dividend Tax Rates:

Basic Rate: 8.75%

Higher Rate: 33.75%

Additional Rate: 39.35%

Optimal Salary for Directors

Determining the appropriate salary depends on your company’s eligibility for the Employment Allowance:

If your company does not qualify for the Employment Allowance: If your company has a sole director with no other employees, the Employment Allowance cannot be claimed. In this case, setting an annual salary at the Secondary Threshold of £5,000 is advisable to avoid employer NICs. However, this amount is below the Lower Earnings Limit (£6,500 for 2025/26), meaning it won’t earn NIC credits toward your state pension. To accrue these credits, you might consider a salary of £6,500, which would incur minimal employer NICs.

If your company does qualify for the Employment Allowance: If your company has multiple employees and qualifies for the Employment Allowance (which increases to £10,500 from April 2025), you can set your salary up to the personal allowance of £12,570. While this incurs employer NICs, the Employment Allowance can offset these contributions, making this approach more tax efficient.

Dividend Strategy

After establishing your salary, dividends can be used to extract additional income:

The first £500 of dividends are tax-free due to the dividend allowance. Thereafter Dividends falling within the basic rate band (£12,571 to £50,270 total income) are taxed at 8.75%.

For example, with a salary of £12,570, you can distribute dividends up to £37,700 without exceeding the basic rate threshold, resulting in a total gross income of £50,270. The tax on these dividends would be approximately £3,255.

In Conclusion

A balanced approach of a modest salary combined with dividends continues to be a tax-efficient strategy for directors of UK limited companies in the 2025/26 tax year. However, there are several other considerations, and we would always rather consider your specific situation, so please call us for a chat. For example, if your company pays the higher rate of Corporation Tax you may want to pay a higher salary as PAYE income is a deductible expense for corporation tax purposes, whereas dividends are not.

For individual advice tailored to your business needs, please contact the team at Adams Moore. As part of offering total support for you and your business, we are here to help you develop strategies that align with your business objectives.