Why do directors take salary and dividends?
Limited company directors can choose how to extract profits from their company. Taking a small salary up to the personal allowance or NI threshold, with the remainder as dividends, is often more tax-efficient than a full salary because dividends are taxed at lower rates than employment income and do not attract National Insurance.
What is the optimal salary for a director in 2025/26?
For most directors with no other income, the optimal salary is £12,570, the personal allowance. This means no income tax on salary, and the salary qualifies you for the state pension and benefits. It is also deductible from company profits, reducing corporation tax. From April 2025, the employer NI secondary threshold dropped to £5,000, meaning employer NI is payable on salaries above £5,000.
What is the dividend allowance?
Every individual receives a dividend allowance of £500 in 2025/26, so dividends up to this amount are tax-free regardless of your tax band. Above the allowance, dividends are taxed at 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate). The allowance was reduced from £2,000 to £1,000 in 2023/24 and again to £500 in 2024/25.