Salary and Dividends for Small Company Directors in 2025/26

A Quick and Easy Guide to Salary and Dividends for Small Company Directors in 2025/26

As the new tax year approaches, company directors need to know the best way to pay themselves tax-efficiently. Here’s a simple breakdown:

Optimum salary

For the 2025/26 tax year, the best salary for a company director (in almost all cases) is £12,570. This amount is tax-free, meaning you don’t pay any income tax on it. It also helps you earn credits for your state pension.

If you’re the only director in your company, you’ll have to pay some employer national insurance, but it’s still a good deal because it reduces the company’s overall tax bill.

Dividends

Directors who own shares in their company can take some of their earnings as dividends. Dividends are tax-efficient because you don’t pay national insurance on them and get a tax-free allowance of £500.

Dividends are taxed on the directors’ Self-Assessment Tax Return at 8.75%. In addition to your director's salary of £12,570, dividends can be paid up to £37,700 (presuming no other income sources) before you cross the Higher Rate tax threshold over which dividends are taxed at 33.75%.

Dividends paid up to the Basic Rate threshold would produce a personal tax bill of around £3,255.

Important reminder regarding dividends

Dividends can only be paid from distributable reserves. This means the company needs to have enough left over after paying taxes to cover the dividends. Directors should check the company's performance before declaring dividends to avoid problems (we can help you figure that out).

We recommend regular reviews of the Profit and Loss reports. Ideally, this should be done monthly to help control finances and review business performance.

Other considerations

There are other strategies that we tailor to clients on an individual basis.

Does your company have high profits and high corporation tax? If so, a larger salary might be preferable.

·     Are you of pensionable age?

·     Is your company making a loss and can’t issue dividends?

·     Do you have an overdrawn director’s loan account?

·     Consider benefits-in-kind or pension contributions by the company.

Summary

In most cases, the optimum salary for company directors in the 2025/26 tax year is £12,570. This strategy ensures national insurance credits are earned, avoids income tax, and provides corporation tax relief.

If we handle your company and personal tax affairs, we will already have considered the best option for you.

Please call us if you need to chat about this.