Answers · UK 2025/26

How should I split salary and dividends as a limited company director to minimise tax?

A common tax-efficient approach for 2026/27 is a salary around the National Insurance Primary Threshold (£12,570) or the Secondary Threshold (£5,000, if it preserves state pension qualification without triggering employer NI), topped up with dividends taxed at 10.75% (basic rate) after the £500 dividend allowance -- but the optimal split depends on the company's profits, your other income, and whether you want to maximise pension contributions instead.

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Director-shareholders of small limited companies often have flexibility over how they extract income -- through salary (subject to Income Tax and National Insurance, but deductible against Corporation Tax) or dividends (not subject to National Insurance, taxed at lower rates than equivalent salary, but paid from post-Corporation-Tax profits). **Why dividends are generally more tax-efficient than salary above a certain point** Salary above the Personal Allowance attracts both Income Tax and Employee National Insurance (8% between £12,570 and £50,270 for 2026/27), plus Employer National Insurance at 15% above the £5,000 Secondary Threshold -- a combined burden that often exceeds the equivalent tax cost of dividends, which are only subject to dividend tax rates (10.75% basic rate, 35.75% higher rate, 39.35% additional rate for 2026/27) after the £500 dividend allowance, with no National Insurance charge at all. **A common salary level: around £12,570** Many advisers suggest a salary at or close to the Personal Allowance (£12,570), which uses up the tax-free Income Tax allowance efficiently, is a deductible expense against Corporation Tax (reducing company profits, and therefore Corporation Tax, since the small profits rate is 19% up to £50,000 and 25% above £250,000, with marginal relief in between), and — provided it is at least at the Lower Earnings Limit — counts as a qualifying year for State Pension purposes, even without actually paying employee National Insurance (which only kicks in above £12,570). **Employer NI consideration** A salary between the £5,000 Secondary Threshold and £12,570 avoids employee NI but does trigger Employer NI at 15% on the portion above £5,000 -- some directors instead keep salary at exactly the Secondary Threshold (£5,000) to avoid Employer NI entirely, though this sacrifices some Corporation Tax deduction and may affect State Pension qualifying year status depending on how the Lower Earnings Limit interacts with actual salary paid. **Using the Employment Allowance** Small companies with more than one employee (note: many single-director companies with no other staff cannot claim it) can claim the £10,500 Employment Allowance for 2026/27, offsetting Employer NI liability -- where available, this can change the maths in favour of a higher salary, since Employer NI cost is effectively reduced or eliminated up to the allowance limit. **Dividends: only from available profits, after Corporation Tax** Dividends can only be paid from the company's retained, post-tax profits -- unlike salary, they cannot be paid if the company has insufficient distributable reserves, and paying dividends when the company has no profits available is unlawful and can create personal liability for the director. **Worked example -- £60,000 total extraction** A director extracting £60,000 total from their company might take a £12,570 salary (no employee NI, some employer NI on the portion above £5,000, deductible against Corporation Tax) and £47,430 in dividends. After the £500 dividend allowance, most of the dividend income would fall in the higher-rate dividend band (35.75%) if it pushes total income above the £50,270 higher-rate threshold, so timing dividends across tax years, or balancing against pension contributions, can further improve efficiency. **Other extraction methods to consider alongside** Employer pension contributions (deductible against Corporation Tax, not subject to Income Tax or NI on the way in) are often the most tax-efficient way to extract additional value beyond a modest salary/dividend combination, particularly for directors who do not need all their income immediately. **Practical tip** The "right" split changes with each Budget (dividend tax rates rose by 2 percentage points from April 2026) and depends on your personal circumstances, so review your salary/dividend strategy with an accountant at least annually, rather than assuming last year's approach remains optimal.