Worked Examples
Example: Optimal Salary and Dividend Split for a Director
A 2025/26 worked example showing a small limited company director's tax bill at different salary/dividend mixes.
Quick answers
What's the most tax-efficient way for a director to take pay?
Most owner-directors take a salary up to the personal allowance (£12,570 in 2025/26) plus dividends to top up. Salary is deductible for Corporation Tax and personal-allowance-tax-free; dividends avoid National Insurance. Cap total income just below the higher-rate threshold (£50,270) to stay in the 8.75% dividend band.
Why not pay yourself entirely in dividends?
Because dividends don't qualify as relevant earnings for pensions, don't build NI credits towards the State Pension, and can't be paid if the company has insufficient distributable profits. A small salary fixes all three.
How much dividend tax do directors pay?
After the £500 dividend allowance, dividends are taxed at 8.75% in the basic-rate band, 33.75% in the higher-rate band and 39.35% in the additional-rate band. There's no National Insurance on dividends.
Example: Optimal Salary and Dividend Split
Tom is the sole director and shareholder of his consultancy company. The company has £60,000 of profit available before his pay. He wants to take all of it as personal income.
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%) + (£60,000 − £50,270 × ?) ...
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 carried back/forward
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
- Salary up to personal allowance is the cheapest way to get the first £12,570 out.
- 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).
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.