The Most Tax-Efficient Way to Pay Yourself as a Company Director in 2025/26

You took £80,000 out of your business last year. Do you know whether that cost you £4,000 in tax or £14,000? Because the answer depends entirely on how you structured it.

When you run a limited company, the money isn't yours until you move it out. Salary and dividends are the two main ways to do it, and they're taxed in opposite directions. Salary reduces your Corporation Tax bill but attracts National Insurance. Dividends don't reduce Corporation Tax, because they come from profit after tax, but they're taxed at lower rates and carry no National Insurance. The efficiency is all in the balance.

Set the salary at £12,570

Everything above your salary comes out as dividends. After a £500 tax-free allowance, dividend tax rates for 2026/27 are 10.75% (basic rate), 35.75% (higher rate) and 39.35% (additional rate), stacked on top of your salary. A pound taken as a dividend in the basic band costs 10.75%. The same pound as salary costs 20% plus NI on both sides. Dividends still win, but the margin has narrowed.

Those rates rose by 2 percentage points in April, and it adds up faster than it sounds. Take an owner drawing £50,000: £12,570 salary, the rest in dividends. That's roughly £4,000 in dividend tax this year, an effective rate of about 8% across the full £50,000. Under the old rates it was closer to £3,250. Same income, same structure, around £744 more tax, purely from the rate change. Scale that to a £120k drawer and the difference runs into four figures. If nobody's re-run your split since the rates moved, you're likely paying the new rate on a structure built for the old one.

Another thing to note is that once total income passes £100,000 your personal allowance tapers away, creating an effective 60% band up to £125,140.

What you should actually do

Set your salary at £12,570 and check whether the Employment Allowance is open to you. Take the rest as dividends, watching the £50,270 and £100,000 thresholds. And with dividends taxed more heavily now, it's worth looking at whether a pension contribution does a better job than the next slice of dividend, because it sidesteps the tax entirely.

Your split should be reviewed every tax year, not set once and forgotten. If nobody's run these numbers with you since the rates changed, that's worth a conversation.

Book a 15-minute review and we'll show you exactly what your most efficient split looks like this year, and what to do before the rates change.

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