For UK company directors, how you extract profit from your business has a direct impact on how much tax you pay. The most common approach is a combination of a low salary and dividends — but the right split has shifted significantly since April 2025, when employer NIC rose to 15% and the secondary threshold dropped to £5,000.
This article models the most tax-efficient options for 2025/26 across several profit levels.
Why the Director Salary Changed in 2025/26
Before April 2025, the most common advice was to pay yourself a salary of £9,100 per year — the level of the employer NIC secondary threshold. This meant no employer NIC was payable and the salary qualified you for National Insurance credits (protecting your state pension entitlement).
From 6 April 2025, the secondary threshold dropped to £5,000 and the employer NIC rate rose to 15%. This means any salary above £5,000 now attracts employer NIC at 15%.
Option A: Salary of £5,000 — below the employer NIC threshold. No employer NIC. But no NI credit for the year (does not protect your state pension record).
Option B: Salary of £12,570 — equal to the personal allowance. Employer NIC of £1,135.50 is payable, but the salary qualifies for NI credits and is fully deductible against company profits.
The Numbers: Which Is More Efficient?
The right choice depends on your company profit level and personal circumstances. Here is a worked comparison for a director with no other income:
| Factor | £5,000 Salary | £12,570 Salary |
|---|---|---|
| Employer NIC payable | £0 | £1,135.50 |
| Employee NIC payable | £0 | £0 (below threshold) |
| Income tax on salary | £0 | £0 (within personal allowance) |
| CT saving on salary (at 19%/25%) | £950 / £1,250 | £2,588 / £3,392 |
| State pension NI credit | No | Yes |
For most directors, a salary of £12,570 remains more efficient overall when the Corporation Tax saving and state pension entitlement are factored in — despite the employer NIC cost.
However, where the Employment Allowance is available (most companies with employees other than the sole director), employer NIC can be offset — making £12,570 clearly the better choice. Sole director companies with no other employees do not qualify for the Employment Allowance.
Dividends: Rates and Allowances for 2025/26
Dividends are paid from post-tax company profits. They are not subject to NIC, which makes them tax-efficient compared to salary above the personal allowance. The current rates are:
| Rate Band | Dividend Tax Rate | Income Range |
|---|---|---|
| Dividend allowance | 0% | First £500 |
| Basic rate | 8.75% | £12,571 – £50,270 |
| Higher rate | 33.75% | £50,271 – £125,140 |
| Additional rate | 39.35% | Above £125,140 |
The dividend allowance has reduced significantly in recent years — from £2,000 in 2022/23 to just £500 in 2025/26. Directors who previously relied on the allowance will be paying more tax on dividends than before.
A Worked Example: Company Profit of £80,000
Director pays themselves £12,570 salary (within personal allowance) and takes the remainder as dividends. Company profit before director costs: £80,000.
- Salary: £12,570 — no income tax, no employee NIC
- Employer NIC on salary above £5,000: £1,135.50
- Remaining company profit after salary and employer NIC: approx £66,295
- Corporation Tax at small company rate (19%): approx £12,596
- Available for dividend: approx £53,699
- Dividend allowance: £500 at 0%
- Remainder taxed at basic rate (8.75%): approx £4,644
- Total tax and NIC: approx £18,376
These are indicative figures. Your exact position will depend on other income, pension contributions, and whether the Employment Allowance applies.
Pension Contributions: The Often-Overlooked Option
Employer pension contributions are fully deductible against Corporation Tax and exempt from NIC entirely. For directors approaching the higher rate threshold, making employer pension contributions before year-end can be significantly more efficient than taking additional dividends. See our separate article on pension contributions as a Corporation Tax planning tool.
What You Should Do
- Review your salary level with your accountant before the start of the tax year — the right answer for 2025/26 depends on your specific circumstances
- If you have other employees, check whether the Employment Allowance applies to your company
- Consider employer pension contributions as part of your overall extraction strategy
- Do not assume the same approach as last year is still optimal — the NIC changes have shifted the calculation
See HMRC's guidance on employer NIC rates and thresholds for 2025/26 and tax on dividends.
General information only. This article provides general guidance on UK tax and accounting matters and reflects our understanding of legislation and HMRC guidance at the time of publication. Tax rules, rates, and thresholds change frequently. Nothing in this article constitutes personalised tax or financial advice. Always seek advice specific to your circumstances from a qualified accountant before taking action. Ledgertech Accountants Ltd accepts no liability for any loss arising from reliance on this content.
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