Director Salary vs Dividends 2025/26: Which Saves More Tax?

Choosing between a director’s salary and dividends in 2025/26 could be the key to saving more tax. This quick guide explains how to structure your income smartly and avoid paying more than you need to.

Paying Yourself a Salary in 2025/26

Most directors pay themselves a low salary to cut down on Income Tax and National Insurance while still getting state pension credits.

For 2025/26, many choose a salary of around £9,100 because it’s below the employer National Insurance threshold, meaning no extra NI costs for the company.

It’s also high enough to qualify for state pension benefits.

If you're looking at the minimum director salary in the UK you can take while still qualifying for state benefits, this level is often the sweet spot.

This salary counts as a business expense, helping lower your Corporation Tax bill.

Any extra income you need can then be taken as dividends, which are taxed at lower rates than salary.

Some directors also ask about a director's salary without payroll, but normally if you are drawing a salary from a limited company, even a small one, you need to register for PAYE, even if no tax is due.

Taking Dividends in 2025/26

Dividends are a common way for directors to pay themselves more tax-efficiently.

They’re paid from company profits after Corporation Tax and are not subject to National Insurance.

In 2025/26, you get a £500 tax-free dividend allowance. After that:

• Dividends up to £50,270 total income are taxed at 8.75%.

• Higher earnings are taxed at 33.75% or 39.35%.

Because dividend tax rates are lower than Income Tax rates, and there’s no NI, most directors combine a small salary with dividends to create a tax-efficient salary structure.

However, dividends can only be paid if the company has enough profits after tax, so it’s important to plan ahead. 

At JAFA, we offer financial forecasting services to help you stay compliant. You can book a FREE discovery call today to ensure your dividends are being paid legally. 

Which Saves More Tax? 

For 2025/26, taking a low salary combined with dividends usually saves the most tax for directors.

A small salary uses your tax-free Personal Allowance and cuts down Corporation Tax. Dividends are taxed at lower rates and aren’t hit with National Insurance.

This mix means you pay less tax overall compared to taking just salary or just dividends and you still qualify for state pension credits.

It’s the most popular strategy for directors who want to keep more of their income legally and efficiently.

Example

Let’s say your company makes £50,000 profit. You have two options to take this money:

Option 1: Small Salary + Dividends

You pay yourself a small salary to stay tax-efficient and take the rest as dividends. You keep much more of your profit after tax and National Insurance.

Option 2: Full Salary

You take the whole amount as salary. You lose a lot more money on Income Tax and National Insurance.

Result? Choosing a small salary combined with dividends can leave you with more money in your pocket compared to taking everything as salary because dividends are taxed at lower rates and aren’t hit with National Insurance.

What We Think

Working out the best way to pay yourself isn’t as simple as it should be for directors.

The system makes it easier for those who know how to mix a low salary with dividends, but directors who just take a salary often end up paying more tax and National Insurance without realising it.

We think the rules could be clearer and fairer, especially for smaller companies.

Without the right advice, it’s easy to miss chances to save money.

That’s why we always recommend reviewing your salary and dividends every year, so you can keep more of what you earn and stay ahead of any tax changes.

How JAFA Can Help

At JAFA, we help directors make smart decisions about how to pay themselves.

We’ll work with you to set the right balance between salary and dividends - keeping tax bills low while making sure you stay compliant.

Because the rules change often, we’ll review your situation every year and update your strategy if needed.

That way, you won’t miss out on tax savings or get caught out by new thresholds or allowances.

Contact our expert accountants based in Birmingham, UK, either by booking a FREE discovery call or calling us on +44 121 227 6277.