Pay Yourself in 2025/26 – A Guide for UK Directors

  • Tax
  • Steady Read

Pay Yourself in 2025/26 – A Guide for UK Directors

  • Recent Thinking

Table of Contents

Let’s set the scene

As a director-shareholder of your own creative or digital business, one of the most important financial decisions you’ll make each year is how to pay yourself. Get it right, and you’ll keep significantly more of what you earn. Get it wrong, and you could be handing thousands of pounds to HMRC unnecessarily.

Whether you’re a freelance creative, running a small design studio, a growing digital marketing agency or any other creative enterprise, the fundamental question remains the same: what’s the most tax-efficient way to extract money from your limited company?

This guide walks you through the optimal approach for the 2025/26 tax year, step by step.

Salary + Dividends v Salary alone

Before we dive into the specifics, let’s understand why most owner-managed business directors use a combination of salary and dividends rather than salary alone.

When you pay yourself a salary, your company gets Corporation Tax relief on the expense, which is beneficial. However, salaries also trigger National Insurance contributions from both you (employee’s NI) and your company (employer’s NI). These can add up quickly on earnings above certain thresholds.

Dividends, on the other hand, are paid from your company’s after-tax profits. While they don’t provide Corporation Tax relief, they’re not subject to National Insurance at all. For amounts above a modest salary level, dividend tax rates are considerably lower than the combined impact of income tax and NI on salary.

The sweet spot? A combination to maximise tax efficiency and meet your income needs.

Step 1 – Start with the Personal Allowance

For most directors, the most tax-efficient first step is to pay yourself a salary up to the Personal Allowance of £12,570 for 2025/26.

This portion of your income is completely free from income tax. However, you will need to consider National Insurance contributions if your salary exceeds the NI thresholds, which we’ll address in the next steps.

Key point: Using your full Personal Allowance through salary means you’re extracting £12,570 from your company with income tax relief for the business and no income tax for you personally.

Step 2 – Consider the Employment Allowance

The Employment Allowance is a valuable relief that can offset your company’s employer’s National Insurance bill. From April 2025, it’s worth £10,500 per year.

Here’s what you need to know:

The catch: Most single-director companies don’t qualify for the Employment Allowance unless they have other employees on the payroll. If you’re the sole director and only employee, you won’t be able to claim it.

The opportunity: If your company does have other employees (perhaps a part-time assistant, a junior designer, or anyone else on payroll), you can claim the allowance and use it to offset the employer’s NI on all employees’ salaries, including your own.

The impact: If you can claim it, you can pay yourself a higher salary without your company bearing the employer’s NI cost, making salary extraction more attractive.

Important note: Even where the Employment Allowance can’t be claimed, the Corporation Tax deduction your company receives on salary (sliding between 19% and 25% for profitable companies) is actually greater than the employer’s NI cost (15%), making salary up to the Personal Allowance tax-efficient regardless.

Step 3 – Set your optimal salary

Your optimal salary depends on whether you can claim the Employment Allowance.

If Employment Allowance IS Available

Pay yourself a salary equal to the NI Primary Threshold of £12,570 (which conveniently matches the Personal Allowance for 2025/26). The employer’s NI will be covered by the allowance, and you’ll benefit from:

  • Full use of your Personal Allowance (no income tax)
  • Qualifying years counted toward your State Pension
  • Minimal or no employer’s NI cost to your company

If Employment Allowance is NOT Available

You have two practical options:

Option A: Full Personal Allowance Salary (£12,570) – Recommended

This remains the most tax-efficient approach overall. Here’s why:

  • You pay no income tax (it’s within your Personal Allowance)
  • You pay employee’s NI at 8% on earnings above £12,570, but since your salary equals this amount, you’re right at the threshold
  • Your company pays employer’s NI at 15% on earnings above the Secondary Threshold (£5,000)
  • Your company gets Corporation Tax relief between 19% and 25%
  • Net benefit to you personally: you’ve extracted £12,570 at minimal overall tax cost
  • You secure qualifying years for State Pension 

Option B: Secondary Threshold Salary (£5,000) – Less admin

Some directors prefer this to avoid paying NI:

  • No employee’s NI (below the Primary Threshold)
  • No employer’s NI (at the Secondary Threshold)
  • Full Corporation Tax relief for the company
  • However, you’re not using your full Personal Allowance
  • You DO NOT earn pension credits

Our recommendation: Option A (£12,570 salary) is generally best. While it involves NI payments, the tax efficiency and pension entitlement make the additional compliance worthwhile.

Step 4 – Take the rest as Dividends

Once your salary is set, dividends become the most tax-efficient way to extract additional income from your company.

How Dividends Work

Dividends are distributions of your company’s after-tax profits. Your company must have sufficient retained profits (or distributable reserves) to pay them legally.

Unlike salary:

  • Dividends carry no National Insurance liability for you or your company
  • They’re taxed at lower rates than salary (though on post-Corporation Tax profits)
  • They’re more flexible – you can adjust dividend payments throughout the year based on your company’s profitability and your personal income needs

Dividend Tax Rates for 2025/26

  • £500 Dividend Allowance: Your first £500 of dividends each year is tax-free
  • 8.75%: Basic rate (on dividends within the basic rate band)
  • 33.75%: Higher rate (once total income exceeds £50,270)
  • 39.35%: Additional rate (once total income exceeds £125,140)

Example calculation:

Let’s say you’re a freelance copywriter operating through your own limited company. You’ve paid yourself a salary of £12,570 and want to extract an additional £30,000.

  • Salary: £12,570
  • Dividends: £30,000
  • Total income: £42,570

Tax breakdown:

  • Income tax on salary: £0 (within Personal Allowance)
  • Dividend allowance: £500 (tax-free)
  • Remaining dividends: £29,500
  • Dividend tax (basic rate): £29,500 × 8.75% = £2,581.25
  • Total personal tax: £2,581.25

Compare this to taking the full £42,570 as salary.

Step 5 – Watch the tax bands

The basic rate band for 2025/26 extends to £50,270 of total income (that’s the Personal Allowance of £12,570 plus the basic rate band of £37,700).

Once your combined salary and dividend income exceeds this threshold, you move into the higher rate band, where dividend tax jumps from 8.75% to 33.75% – a significant increase.

Keep your eye on this! 

If your business is profitable enough to pay you more than £50,270, you’ll want to think carefully about:

  • Timing: Can you defer some dividends to the next tax year to stay in the basic rate band?
  • Pension contributions: Contributing to a pension reduces your taxable income
  • Spousal income splitting: If your spouse/partner is a shareholder and has a lower income, dividend payments to them may be taxed at a lower rate

Important threshold to watch: Your tax free Personal Allowance starts to taper once income exceeds £100,000 (you lose £1 of Personal Allowance for every £2 earned above this level).

Step 6 – Consider pension contributions

Pension contributions are one of the most tax-efficient ways to extract value from your company, particularly if you’re a higher-rate taxpayer.

Two Ways to Contribute

Personal contributions:

  • You make the contribution from your post-tax income
  • You receive 20% tax relief automatically
  • You claim additional relief through your Self Assessment if you’re a higher or additional rate taxpayer
  • The contribution reduces your taxable income, potentially keeping you in a lower tax band

Employer contributions (usually more efficient):

  • Your company makes the contribution directly to your pension
  • The company gets Corporation Tax relief
  • No National Insurance is due
  • The contribution doesn’t count as your personal income, so no income tax
  • Must be commercially justifiable and proportionate to your salary

Step 7 – Consider student loans

If you’re repaying a student loan, your repayment amount is based on your total income (salary plus dividends). Taking more as dividends and less as salary won’t reduce your student loan repayments – Plan 1, 2, 4, and Postgraduate loan thresholds apply to total income.

However, dividends aren’t subject to automatic deductions through payroll. You’ll report them on your Self Assessment, and HMRC will adjust your payment on account or tax code accordingly.

Step 8 – Consider child benefit

The High Income Child Benefit Charge applies when your income exceeds £60,000.

Step 9 – Review Annually!

Tax bands, NI thresholds, allowances, and rates change regularly. What’s optimal this year might not be next year.

At the start of each tax year, review:

  • Your salary level against current NI thresholds
  • Dividend allowances and rates
  • Your expected income needs against tax band thresholds
  • Your company’s projected profitability
  • Changes to your personal circumstances (student loans paid off, children, pension goals)

This annual review ensures your remuneration strategy remains optimal and aligned with both your business performance and personal financial goals.

Step 10 – Your remuneration checklist

Here’s your quick reference for the 2025/26 tax year:

✓ Set salary at £12,570 to use your Personal Allowance and qualify for State Pension (or £5,000 if you want to avoid NI admin)

✓ Claim Employment Allowance if eligible (requires other employees)

✓ Extract additional income as dividends to minimise National Insurance

✓ Keep total income below £50,270 if possible to stay in the basic rate band for dividends

✓ Consider pension contributions especially if you’re a higher-rate taxpayer

✓ Watch for personal allowance tapering above £100,000

✓ Factor in student loans and child benefit if applicable

✓ Only pay dividends when profits support them – maintain proper records

✓ Review your strategy annually as rates and thresholds change