For owner-managed companies, one of the most common questions every year is: what is the most tax-efficient director's salary? The answer changed for 2025/26 because of significant National Insurance reforms. Here is how to think about it.
Salary vs dividends: the basic strategy
Most director-shareholders take a small salary plus dividends. The salary:
- Is a deductible expense that reduces Corporation Tax;
- Preserves your entitlement to the State Pension and benefits if set above the National Insurance lower earnings limit;
- Uses your tax-free personal allowance.
Dividends are then taken on top, taxed at lower rates than salary and free of National Insurance.
What changed in 2025/26
From 6 April 2025, two changes reshaped the calculation:
- The employer's National Insurance rate rose to 15%; and
- The secondary (employer) threshold fell to £5,000, meaning employer NIC starts much earlier on salary.
At the same time, the Employment Allowance increased to £10,500, which many companies can use to offset employer NIC.
The two common scenarios
- Single-director companies with no Employment Allowance: a sole director cannot usually claim the Employment Allowance. Here, paying a salary above £5,000 triggers employer NIC at 15%, so the maths often favours a salary around the secondary threshold, with the rest taken as dividends — though a salary up to the £12,570 personal allowance can still be worthwhile because the Corporation Tax saving can outweigh the NIC cost.
- Companies with two or more employees claiming the Employment Allowance: the allowance can absorb the employer NIC, so a salary of £12,570 (the full personal allowance) is frequently optimal.
The right figure depends on your exact circumstances — other income, available allowances, and whether the Employment Allowance is available. The difference between the options is usually a few hundred pounds, but it adds up.
Don’t forget the dividend rules
Dividends can only be paid from retained profits, must be properly documented with board minutes and vouchers, and use up the (now small) dividend allowance before being taxed at the dividend rates. Getting the paperwork wrong can turn a dividend into an unlawful distribution.
How PushDigits can help
We run the numbers for your specific situation, set up a compliant salary and dividend strategy, and handle the payroll and documentation. See our Tax Planning service or book a free consultation.