Stertha Advisory
    Tools & Calculators

    Dividend vs Salary Optimiser

    Find the most tax-efficient split between salary and dividends for UK company directors. Side-by-side comparison using 2025/26 HMRC rates including the April 2025 employer NI changes.

    UK 2025/26
    Last updated
    Director & Company Details
    UK 2025/26 tax rates · Employer NI 15% from April 2025
    £
    £
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    Employment income, rental income, etc.

    2025/26 Rates Used

    Income Tax0% / 20% / 40% / 45%
    Employee NI0% / 8% / 2%
    Employer NI15% above £5,000
    Dividend Tax8.75% / 33.75% / 39.35%

    How the Optimal Split Is Calculated

    Most UK company directors take a combination of salary and dividends rather than either alone. Salary is a deductible business expense that reduces corporation tax, but it attracts income tax and National Insurance on both sides of the payroll. Dividends are paid from post-tax profit (so no corporation tax deduction) and carry lower dividend tax rates, but there is no NI on dividends.

    The optimal strategy for most directors involves taking a salary equal to the personal allowance (£12,570 in 2025/26), just enough to preserve the National Insurance credit for state pension entitlement without triggering income tax. The remainder of the desired income is then drawn as dividends, using the £500 dividend allowance before dividend tax at 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate).

    The October 2024 Budget increased employer National Insurance from 13.8% to 15%, effective April 2025, and reduced the secondary threshold from £9,100 to £5,000. This makes salary more expensive for the company at lower levels — strengthening the case for the personal-allowance salary strategy.

    The optimal split shown here uses the personal allowance as the salary benchmark — appropriate for most directors with no other employment income. Your actual optimum depends on pension contributions, other income sources, the Employment Allowance, and whether you have non-director employees.

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    Frequently Asked Questions

    Why do most company directors take a mix of salary and dividends?
    A salary equal to the personal allowance (£12,570 in 2025/26) is typically the most efficient structure. It preserves state pension NI credits, uses the personal allowance tax-free, and keeps employer NI low. Salary above this level triggers income tax and employee NI — costs that dividends avoid. Dividends carry lower tax rates (8.75% basic, 33.75% higher, 39.35% additional) and no NI.
    How does the 2025/26 employer NI increase affect director pay?
    From April 2025, employer NI rose from 13.8% to 15%, and the secondary threshold was reduced from £9,100 to £5,000. This makes salary more expensive for the company at lower levels, strengthening the case for keeping the director's salary at or near the personal allowance.
    Is there a maximum amount of dividends I can take?
    Dividends can only be paid from a company's distributable reserves — broadly, accumulated post-tax profits. There is no HMRC cap, but dividends must be declared by the board, properly documented with board minutes and dividend vouchers, and paid proportionally to shareholders in the same class. Dividends from insufficient reserves are unlawful.
    Do dividends count towards pension contribution allowance?
    No. Pension contributions are based on 'relevant UK earnings', which includes salary — but not dividends. If a director takes only dividends, they can contribute only £3,600 per year to a pension (the minimum for those with no relevant earnings). Maintaining a meaningful salary is important for pension planning.
    What is the most tax-efficient director salary in 2025/26?
    For most directors with no other income, the most tax-efficient salary is £12,570 — equal to the personal allowance. No income tax on the salary, no employee NI. Employer NI: (£12,570 − £5,000) × 15% = £534, which is deductible for corporation tax. If the Employment Allowance applies (not available for sole-director companies), a higher salary may be efficient.

    Disclaimer: These calculators provide estimates for illustrative purposes only and do not constitute tax, legal, or financial advice. Figures are based on published UK 2025/26 rates. Your actual liability will depend on your full circumstances. Stertha Advisory Ltd accepts no liability for decisions made based on these estimates. Please consult a qualified adviser for tailored guidance.

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