Paying yourself correctly as a company director can make a significant difference to your personal and business tax bills. In this guide, we explain the most tax-efficient salary for the 2025/26 tax year and how to combine it with dividends for maximum benefit.
💼 What Is the Optimum Director’s Salary in 2025/26?
For the 2025/26 tax year, the most tax-efficient salary for many directors is £12,570 per annum, which works out as:
£1,047.50 per month, or
£241 per week
This salary level ensures you:
Stay within your personal allowance (so no income tax is due)
Don’t pay employee National Insurance
Still qualify for a State Pension year
🧾 Why £12,570?
The £12,570 figure isn’t random — it’s based on key tax thresholds:
Personal allowance = £12,570 (tax-free income)
Primary NI threshold = £12,570 (no employee NI due below this)
Lower earnings limit = £6,500 (earn above this, and it counts for State Pension)
Secondary NI threshold = £5,000 (employer NI kicks in above this)
By paying exactly £12,570, you avoid employee NI, earn a qualifying year for pension, and the salary is also tax-deductible, reducing your corporation tax.
🔢 Corporation Tax Savings
Although employer’s NI is due (approximately £1,136), the company can still save more in corporation tax, depending on its rate:
Corporation Tax Rate | Tax Saving | |
|---|---|---|
19% (Small profits) | £1,654 | |
25% (Main rate) | £2,307 |
These savings outweigh the employer’s NI cost — which is why this salary is still optimal.
👥 What About Sole Directors?
If you're the only director and have no other employees, you can’t claim the Employment Allowance, meaning you'll pay the full employer NI of £1,136.
Still, we recommend paying the full £12,570 salary. Why?
The corporation tax saved still exceeds the NI cost.
You get a qualifying year for the State Pension.
A lower salary (e.g. £5,000) saves NI but misses out on tax relief and pension benefits.
📉 When Might a Lower Salary Be Better?
A reduced salary or even no salary might be more appropriate if:
You have other income (e.g. pension, rental, or another job)
You’re already over State Pension age
You don’t need another qualifying year for State Pension
⚠️ In these cases, it's best to seek personalised tax advice to avoid unnecessary tax bills.
💷 Why Not Pay a Higher Salary?
Once you go above £12,570:
Income tax and NI contributions apply
The combined tax rate often exceeds dividend tax rates
Dividends remain a more tax-efficient way to extract further income
Even accounting for the corporation tax savings on a higher salary, dividends usually come out ahead.
👨👩👧 Should You Employ a Spouse or Partner?
If you want to qualify for Employment Allowance (worth up to £10,500 in 2025/26), your company must have more than one employee.
This could include:
A partner or spouse helping with admin
Someone supporting with invoicing, bookkeeping, or PA duties
Employing a partner can unlock further savings — but comes with employment law obligations. So consider this carefully.
📝 What About Dividends?
After paying yourself the optimum salary of £12,570, the rest of your income should usually come from dividends.
Here’s how it breaks down in 2025/26:
First £500 of dividends = tax-free (dividend allowance)
Up to £50,270 total income = 8.75% dividend tax
Above this = higher rates (33.75% or 39.35%)
💡 A director earning £50,270 via salary + dividends pays around £3,255 in personal tax — that’s just 6.5% effective tax rate.
📋 How to Set Up Payroll
To pay yourself a salary, your company must:
Register for PAYE with HMRC
Submit payroll information (Real Time Information)
Choose how to calculate NI (annual vs monthly method)
Using the annual method can delay employer NI until month 5, improving cash flow early in the tax year.
✅ Conclusion: Our Recommendation
For the 2025/26 tax year:
Pay yourself a salary of £12,570
Take further income as dividends
Consider employing another person if you want to access the Employment Allowance
Always review your full financial situation before deciding — one size does not fit all
Need tailored advice? Speak to a specialist to optimise your personal and company tax position.
Photo by Carrie Allen
