The question every UK owner-manager asks their accountant at least once a year — "should I pay myself in salary or dividends?" — has a different answer in 2025-26 than it had a decade ago. The traditional rule of thumb was simple: pay a small salary to use the personal allowance, take everything else as dividends. The rule still broadly holds, but the numbers have tightened, and several specific situations now point the other way.
The rates that matter in 2025-26
- Corporation Tax: 19% up to £50,000 profit, 25% above £250,000, marginal relief between (effective rate around 26.5% in the band).
- Employer NIC: 15% on earnings above the £5,000 secondary threshold.
- Employee NIC: 8% on earnings between £12,570 and £50,270, 2% above.
- Personal allowance: £12,570 (tapered to zero between £100,000 and £125,140 of income).
- Dividend allowance: £500.
- Dividend tax rates: 8.75% basic, 33.75% higher, 39.35% additional.
The baseline strategy: £5,000 salary plus dividends
For a single-director company that cannot claim Employment Allowance, the optimal salary in 2025-26 is typically £5,000 — equal to the secondary threshold, so no Employer NIC is due. The salary is deductible against Corporation Tax (saving 19%–26.5%) and produces no Employer NIC or Employee NIC. The director's personal allowance is partly unused, but the gap can be closed through other income sources.
Everything above £5,000 is then taken as dividends from post-tax company profits.
The alternative: £12,570 salary plus dividends — when Employment Allowance is available
For a multi-employee company with Employment Allowance available, a higher salary works because the Employer NIC on the director's salary is absorbed by the allowance. Paying £12,570 of salary:
- Uses the full personal allowance (no income tax).
- Counts as a qualifying year for State Pension.
- Generates around £1,135 of Employer NIC at 15% on £7,570 — but the £10,500 allowance covers it.
- Saves Corporation Tax at 19%–26.5% on the full £12,570.
This route is usually the right answer for companies with the allowance.
Worked example: extracting £50,000 for a higher-rate director
For example, a director-shareholder of a profitable Ltd company (profit £200,000, in the marginal CT band at 26.5%) wants to extract £50,000 of personal income. The director already has the £5,000 baseline salary, so the £50,000 is the additional extraction.
Option A: Pure dividend
- Gross profit to fund £50,000 dividend after 26.5% CT: £68,027.
- Dividend tax (basic-rate band already used, all at 33.75% — minus £500 allowance): £16,706.
- Net to director: £33,294. Cost to company: £68,027.
Option B: Additional salary (single-director, no Employment Allowance)
- To pay £50,000 of additional salary, company pays £50,000 + 15% Employer NIC = £57,500.
- CT saving on £57,500: 26.5% = £15,238.
- Net company cost: £42,262.
- Director pays 40% income tax + 2% NIC on this band: £21,000 income tax + £1,000 NIC = £22,000.
- Net to director: £28,000.
Option C: Employer pension contribution
- Company pays £50,000 into the director's SIPP as employer contribution.
- No Employer NIC, no Employee NIC, no income tax now.
- CT saving: 26.5% = £13,250.
- Net company cost: £36,750.
- Director's pension fund value: £50,000. Personal tax deferred until drawdown.
The dividend route delivers more personal cash today (£33,294 vs £28,000 vs £0 immediately) but the pension route costs the company least, builds the most wealth, and defers all personal tax. For directors who do not need every pound today, blending all three is the most efficient outcome.
The £100,000 cliff
Once total personal income approaches £100,000, the personal allowance starts to taper away — producing an effective marginal rate of 60% in the £100,000–£125,140 band. Owner-managers expecting to cross that threshold should consider redirecting the marginal income into pension via employer contribution, which keeps adjusted net income below £100,000 and preserves the personal allowance. The combined saving from preserved allowance, avoided income tax, and avoided NIC frequently exceeds the loss of liquidity.
How PushDigits models this
For every owner-managed client, our tax planning team builds an annual remuneration model showing salary, dividend, and pension splits across multiple scenarios — including the impact on personal allowance, child benefit, student loan, and inheritance tax position. We coordinate the company side through our business advisory team and the personal side through Self Assessment.
If your remuneration package was set up under the old rates and has not been refreshed for 2025-26, the chances are very high that you are paying more tax than you need to. Book a 30-minute owner-manager review with PushDigits or get in touch via our contact page. We will model the numbers for your specific position and show you the most efficient mix for the year ahead.