If you are a director looking for the most tax efficient salary and dividends 2025/26 strategy, this guide is for you. Running your own limited company gives you flexibility, but also comes with important tax planning decisions. One of the most common questions we get at Southside Accountants in Wimbledon is:
“How much salary and dividends should I take in 2025/26?”
If you are both a company director and shareholder, this blog walks you through a tax-smart approach to extracting profits.
Tax-Efficient Pay Strategy for 2025/26
✔️ Recommended Salary: £12,570 per year (£1,047.50/month)
This amount:
- Uses up your tax-free Personal Allowance
- Keeps your income tax at zero
- Qualifies for National Insurance credits (for your state pension)
- Is fully deductible for Corporation Tax
⚠️ Employment Allowance: Does Your Company Qualify?
The £5,000 Employment Allowance can reduce your employer’s National Insurance bill—but many small companies do not qualify.
Here is how it works:
❌ You cannot claim if:
- You are the only director, and
- There are no other employees earning above the Secondary Threshold (£9,100/year in 2025/26)
✅ You can claim if:
- You have at least one employee (not a director) earning over £9,100
- Or you have two directors, and both are paid over £9,100/year
Source: HMRC guidance confirms:
“Q Ltd employs two paid directors. Both are paid above the Secondary Threshold. The company is eligible to claim the Employment Allowance for the whole tax year.”
HMRC Employment Allowance Guidance
Salary Options Based on Eligibility:
| Scenario | Optimal Salary | Notes |
|---|---|---|
| Only 1 director (no other employees) | £9,100/year (£758.33/month) | Avoids employer NIC – Employment Allowance not available |
| 2 directors (both paid > £9,100) | £12,570/year each | Claim Employment Allowance – no employer NIC due |
| Director + staff member (paid > £9,100) | £12,570/year | Claim Employment Allowance – salary fully deductible |
Dividend Planning for Directors in 2025/26
Dividends remain a very tax-efficient way to take income from your company, even with the shrinking Dividend Allowance.
Dividend Allowance for 2025/26: £500 only
This has dropped significantly from previous years, so careful planning is essential.
Dividend Tax Rates (after allowance):
| Tax Band | Tax Rate |
|---|---|
| Basic rate | 8.75% |
| Higher rate | 33.75% |
| Additional rate | 39.35% |
✅ Optimised Salary and Dividend Mix for Directors
If your company has sufficient profits and you want to stay in the basic rate band, consider this:
- Salary: £12,570
- Dividends: Up to £37,700
- Total income: £50,270
This keeps you just under the higher-rate threshold, making use of your Personal Allowance, Dividend Allowance, and basic rate band effectively.
Adjust salary to £9,100 if your company is not eligible for Employment Allowance.
What If You Have Other Income, Like Rental Income?
If you have rental income, self-employment, or other taxable income outside your limited company, this affects how much salary and dividends you can take tax-efficiently.
Example: You Have £10,000 Rental Income
Let’s say you earn £10,000 per year in rental income.
- This uses up most of your £12,570 Personal Allowance
- If you also take a £12,570 salary, the final £2,570 of that salary will be taxed at 20%
- You will move more quickly into the higher rate dividend tax band, where dividend tax jumps to 33.75%
✅ More Tax-Efficient Strategy
- ✔️ Take a salary of £9,100 — no income tax, no NIC, qualifies for NI credits, and is Corporation Tax deductible
- ✔️ Then take up to £31,170 in dividends to stay within the basic rate tax band (ending at £50,270 total income)
Breakdown:
- Rental Income: £10,000
- Salary: £9,100
- Dividends: £31,170 (includes £500 tax-free Dividend Allowance)
Total income: £50,270 — right at the top of the basic rate threshold.
This strategy ensures:
- You avoid NIC and higher income tax on salary
- You only pay 8.75% tax on most of your dividends
- You stay fully within the basic rate band
Advanced Scenario: £20,000 Rental Income
What if you earn £20,000 a year in rental income before taking any salary or dividends?
This puts you in a more complex position for tax planning — but the principle of tax efficiency still applies.
❓ Is it still worth taking a salary?
Yes — but only a £9,100 salary. Even though your Personal Allowance has already been used up, this small salary:
- Is taxed at 20% (£9,100 × 20% = £1,820)
- ✅ Does not trigger NIC
- ✅ Generates a Corporation Tax saving (£9,100 × 19% = £1,729)
- ✅ Qualifies for state pension through NI credits
Comparison: £9,100 Salary + Dividends vs. Dividends Only
| Strategy | Personal Tax | Corp Tax Saving | Net Tax Cost |
|---|---|---|---|
| ✔️ £9,100 Salary + Dividends | £3,630 | –£1,729 | £1,901 |
| ❌ Dividends Only | £2,605 | – | £2,605 |
✅ Verdict:
Even with £20,000 rental income, taking a £9,100 salary + dividends results in a lower overall tax bill.
Tax-efficient takeaway: Unless you are in the additional rate band or have other restrictions, it almost always makes sense to take at least a £9,100 salary from your company — even when you have other income sources like property.
Bonus Tax Planning Tips
- ✔️ Use both spouses’ allowances: Consider sharing company shares with your spouse to make use of two personal allowances and dividend bands.
- ✔️ Company pension contributions: These are tax-deductible for the company and can help you save tax-efficiently.
- ✔️ Stay updated on thresholds: Monitor tax code changes and dividend limits each year—they move more than people think.
Southside Accountants – Local & National Tax Support
At Southside Accountants, we help small business owners and directors not only in Wimbledon, Tooting, Clapham, Streatham, and Wandsworth — but across the UK.
Whether you are based locally or operate your company from another part of the country, we provide expert remote support and clear tax advice tailored to your needs.
We specialise in helping directors plan salary and dividend strategies, manage PAYE, and stay ahead of changes in tax law — with practical support you can rely on.
✔️ Want to get started with your tax efficient salary and dividends 2025/26 plan? We can help — wherever you are in the UK.
Book a Free Consultation Today
