Most owner/directors I speak to set up their salary and dividends when they first incorporated and haven't revisited it since.
But the tax landscape has shifted considerably. If you haven't reviewed your remuneration structure recently, it's worth a conversation. Here's what's changed and what to be aware of.
The Salary & Dividend Question Every Director Should Be Asking
For most limited company owner-directors, taking a combination of salary and dividends is a well-established and legitimate approach to profit extraction. But the numbers that made sense two or three years ago may not be the most appropriate ones today.
Here's a plain-English overview of what's relevant for 2025/26:
Your salary - the key thresholds
There are three NI thresholds worth knowing:
£6,500 - the Lower Earnings Limit (LEL). Earn at or above this and you accrue a qualifying year towards your State Pension, even if you pay no NI
£5,000 - the Employer's Secondary Threshold. Your company starts paying Employer's NI (now 15% after April 2025's increase) on salary above this figure
£12,570 - the Personal Allowance and Employee Primary Threshold. Salary up to here is income-tax free and attracts no employee NI
For sole directors with no other employees, the company cannot claim the Employment Allowance - meaning a salary of £12,570 will trigger an Employer's NI liability of around £1,136. Whether this is still the most efficient option depends on your wider picture, including corporation tax savings on the salary cost. There is no single right answer - your accountant should model this for your specific situation.
Dividends - what's changed?
The dividend allowance (the amount you can receive tax-free each year) is now just £500 for 2025/26 - down from £5,000 in 2017/18
Above that allowance, dividends are taxed at 8.75% (basic rate), 33.75% (higher rate) or 39.35% (additional rate), depending on your total income
From April 2026, the basic and higher rates are rising by 2 percentage points to 10.75% and 35.75% respectively - so there may be planning opportunities to consider before then
Dividends are not subject to National Insurance, which continues to make them more efficient than salary beyond the personal allowance for most directors but the gap has narrowed
A few things worth thinking about
Are you making full use of your personal allowance across salary and dividends?
Has your income level changed enough to push dividends into a higher tax band?
Have you considered director's pension contributions? These can reduce corporation tax while building long-term wealth outside the dividend framework
If your spouse or civil partner holds shares, are they making use of their own allowances appropriately? (This requires careful legal and tax consideration)
Is your current structure still right given your company's profit level this year?
SOMETHING WORTH KNOWING
From 2025/26, if you receive dividends from a close company (which most small limited companies are), HMRC now requires you to include additional information on your Self Assessment return - including your percentage shareholding. Failure to include this can result in penalties. If you're not sure whether this applies to you, it's worth checking with your accountant before your next return is due.
A NOTE ON THIS:
Everything above is general information only, based on current UK tax rates and thresholds for 2025/26. It is not personal tax advice. Your individual circumstances - including your total income, company structure, profit levels and future plans - will determine what's right for you. Always speak to a qualified adviser before making changes to your remuneration structure.
LET'S TALK
If reading this has prompted any questions about your own setup, I'd love to help. Drop me a message for an informal, no-obligation conversation - no jargon, no pressure, just a straightforward chat.
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