The Most Tax-Efficient Salary for a Director (2025/26)

Last updated June 2026

If you run a limited company outside IR35, one decision quietly shapes your whole tax bill: how much to take as salary versus dividends. Get the split right and you keep more of your money legitimately. This guide explains the 2025/26 logic without the jargon.

Why split at all?

A director can be paid two ways. Salary is a company expense that reduces corporation tax, but it attracts income tax and National Insurance. Dividends are paid from profit after corporation tax, but they carry no National Insurance and are taxed at lower rates (8.75% / 33.75% / 39.35%). The art is combining them so the total tax across the company and you personally is as low as possible.

The popular £12,570 salary

The most common strategy is a salary equal to the personal allowance: £12,570. Here’s the reasoning:

• It sits exactly at the income tax threshold, so no income tax is due on it.
• It’s a company expense, so it reduces corporation tax on every pound.
• It’s above the Lower Earnings Limit, so the year still counts towards your State Pension.

The one downside: at £12,570 there’s a little employee’s and employer’s National Insurance, because the NI thresholds are lower than the personal allowance. For many one-person companies the corporation tax saved on the extra salary still outweighs that NI, making £12,570 the sweet spot. Our calculator defaults to this figure and lets you change it to test alternatives.

Why not take a bigger salary?

Beyond the personal allowance, each extra pound of salary is taxed at 20% income tax plus 8% employee’s NI plus 15% employer’s NI — far more than the 8.75% dividend rate plus corporation tax that the same money would face as a dividend. So once you’ve used the personal allowance, dividends are almost always the cheaper way to extract profit.

Why not take an even smaller salary?

Some directors take a salary at the Secondary Threshold (£5,000) or the Lower Earnings Limit to avoid employer’s NI entirely. That can make sense if you have other employment income elsewhere, or if you don’t want any NI admin. The trade-off is slightly less corporation tax relief. The difference is usually small, so it often comes down to preference and whether you have other PAYE income using your allowance.

Dividends: mind the bands

Dividends stack on top of your salary and are taxed by band:

• The first £500 is covered by the dividend allowance (0%).
• Up to the basic-rate limit, dividends are taxed at 8.75%.
• In the higher-rate band, 33.75%.
• Above £125,140, 39.35%.

This is why drawing every last pound of profit in one tax year can be expensive — pushing dividends into the higher band costs nearly four times the basic rate. Spreading dividends across tax years, or making pension contributions, can keep more of them in the lower band.

Don’t forget the bigger levers

The salary-versus-dividend split is worth getting right, but two other moves often save more:

• Employer pension contributions — the company pays into your pension, gets corporation tax relief, and the money isn’t taxed as income now. For higher earners this is frequently the single most efficient extraction method.
• Timing dividends across tax years — keeping profit in the company and drawing it when it stays in the basic-rate band avoids the higher dividend rates.

The takeaway

For most one-person limited companies outside IR35 in 2025/26, a £12,570 salary plus dividends is the efficient default, with pension contributions as a powerful add-on. But the best mix depends on your other income, your pension plans and how much you need to draw — which is exactly the kind of thing a contractor accountant earns their fee optimising.

General information for the 2025/26 tax year (rest of UK), not personal tax advice.