Example: Salary and Dividend Illustration for a Director

Example: Salary and Dividend Illustration (2025/26)

Tom is the sole director and shareholder of his consultancy company. The company has £60,000 of profit available before his pay. This illustration compares two pay amounts, not equal employer budgets: Option A costs £68,250, exceeding the available £60,000. It does not establish an optimal pay mix. Assume a full year, no other income, England/Wales/Northern Ireland tax rates, no associates and no Employment Allowance.

Option A — All salary (£60,000)

Employee NI:  (£50,270 − £12,570) × 8% + (£60,000 − £50,270) × 2%
            = £3,016 + £195 = £3,211
Income Tax:   (£37,700 × 20%) + (£9,730 × 40%)
              Taxable: £60,000 − £12,570 = £47,430
              Basic: £37,700 × 20% = £7,540
              Higher: (£47,430 − £37,700) × 40% = £3,892
              Total IT = £11,432
Employer NI: (£60,000 − £5,000) × 15% = £8,250

Company perspective:

Profit before pay        £60,000
Less salary             −£60,000
Less employer NI         −£8,250
─────────────────────────────────
Pre-tax profit         (£8,250) — a loss; relief depends on the applicable loss rules
Net to Tom: £60,000 − £3,211 (NI) − £11,432 (IT) = £45,357

But the company has burned an extra £8,250 of cash funding employer NI it can't pay (without further capital).

Option B — Salary £12,570 + dividends £37,180

Salary at the personal allowance, then top up with dividends from post-tax profits.

Salary £12,570
  Income Tax: £0 (within PA)
  Employee NI: (£12,570 − £12,570) = £0
  Employer NI: (£12,570 − £5,000) × 15% = £1,136 (or £0 if Employment Allowance applies)

Company profit after salary: £60,000 − £12,570 − £1,136 = £46,294
Corporation Tax @ 19%:                                  £8,796
Distributable profit:                                  £37,498

Dividend taken: £37,180 (rounded so total income = £49,750, just under higher rate)
  £500 dividend allowance: £0 tax
  Remaining £36,680 in basic rate × 8.75% = £3,210

Tom's total personal tax: £3,210
Net to Tom: £12,570 + £37,180 − £3,210 = £46,540

Tom keeps £1,183 more than under Option A, and the company doesn't run a loss.

Option C — Just below the higher-rate threshold

The default for many directors: extract income up to £50,270 and stop. Anything above runs into 33.75% dividend tax, which combined with Corporation Tax already paid makes it expensive.

Lessons

• A salary at the personal allowance can be one option; it is not automatically the cheapest for every director.
• Dividends avoid all NI but can't reduce Corporation Tax.
• Watch the higher-rate threshold (£50,270) — dividend tax jumps from 8.75% to 33.75%.
• Employment Allowance changes the maths if eligible (companies with multiple employees usually qualify).

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This is general guidance for the 2025/26 UK tax year and is not personal tax advice. Always check the latest figures on GOV.UK or speak to a qualified accountant for your situation.