Are you paying yourself tax-efficiently in 2025/26?
If you are a company director who draws income through both salary and dividends, the start of a new tax year is a prime opportunity to review how you are remunerated.
With Income Tax thresholds remaining static until 2028 and the Dividend Allowance now slashed to just £500, strategies that once provided tax advantages may no longer deliver the same benefit, and in some cases could now be costing you more.
What is the most effective way to take income as a director?
A common approach is to pay a salary up to the Personal Allowance threshold of £12,570. At this level, you gain entitlement to National Insurance (NI) credits, which contribute towards your State Pension, without incurring personal Income Tax or employee NI deductions.
Combining this with dividend payments (where company profits allow), alongside a robust pension contribution plan, could help reduce your overall Income Tax bill.
If your business qualifies for the Employment Allowance, now increased to £10,500, there is even more scope to reduce employer NI costs.
Alternatively, some directors opt for a lower salary, around £6,500, which avoids employee contributions altogether. This can be appropriate for individuals with alternative means of securing NI credits or those with substantial pension savings already in place.
How dividends are now taxed
Dividends continue to attract lower tax rates than earned income (currently taxed at 8.75 per cent for basic rate taxpayers, 33.75 per cent for higher rate, and 39.35 per cent for additional rate bands).
However, the reduced Dividend Allowance means many will find a greater share of their dividend income subject to tax than in previous years.
Despite this, dividends remain a useful tool for extracting profits in a relatively tax-efficient manner, provided they are deployed carefully as part of a wider remuneration strategy.
When dividends are not an option
Dividends can only be paid from retained earnings (profits left after Corporation Tax has been accounted for).
If the company is not profitable, dividends cannot be issued. In such cases, your only option may be to rely on a standard salary.
Tailoring your pay strategy to fit the times
Balancing salary and dividends is still a widely used method of remuneration for directors, but it is now more important than ever to fine-tune the mix.
The goal should be to limit how much of your income falls into higher tax brackets while ensuring you remain compliant and make full use of available reliefs.
Speaking with our tax advisers is the best way to ensure your strategy reflects current legislation and allows you to retain more of what you earn.
Time for a reassessment?
If it has been a while since you looked at how you pay yourself, or if you suspect your current setup is not as tax-efficient as it once was, now is a good time to act.
