What's the Best Director's Salary and Dividends Combination for 2025-26?

Determining the best director's salary and dividend split is the key question for the classic consultant limited company. I've done the same calculation every year since 2015 when I was a full-time finance transformation consultant running my own limited company. Now I get to advise my clients who have the same scenario.

This year's blog post come from a cool cafe cum bar at London Bridge:

What's the Best Director's Salary?

The quick answer is £12,570.

The rest of this blog post covers the "it depends" bits.

The tax-optimal director's salary has been the same for years. This follows the low salary high dividend model tax efficient cash extraction. But there have been changes over time. When I say changes, I mean taxes have crept up (ouch!)

Last tax year, the employer's national insurance (NI) expense was £479 and there was a dividend allowance of £500. This year, the employer's NI expense is £1,136 (up £657) and there is no longer any dividend allowance.

What do the Figures Look Like?

This is using Alongside Accounting's bespoke and patented tax calculation Excel model. 15 years of Excel experience has gone into this!

Assumptions:

• Assumes that you can't claim the Employers Allowance to reduce the employers NI cost, which is typical for a single director limited company setup

• All scenarios assume that all profits are paid out as dividends

• The director is a 100% shareholder of the company

• Company revenue of £52,270 is right up to the basic rate of income tax

Scenarios:

• Scenario A - £12,570 is the maximum salary that you can pay out without incurring employee's NI but employee's NI comes into play

• Scenario B - £6,500 is the minimum required to get the national insurance credit towards your state pension

• Scenario C - £nil director's salary

Conclusions:

• Scenario A - director's salary of £12,570 is optimal for the best take home pay

• Unlike dividends, which are not tax-deductible, salaries and employer's NI reduce corporation tax, thus driving the differences between the scenarios.

Other Advantages of Paying a Director's Salary

You will get a national insurance credit for the year which goes towards your state pension eligibility. If you only pay out dividends then you don't get this credit.

Things to Watch Out For:

• To pay out a salary you'll need to register for PAYE and run a monthly payroll

• You also need to remember to pay your employer's NI bill. A direct debit to HMRC can be set up for this.

• The conclusions rely on your company making taxable profits for the financial year

• The company financial year probably won't line up with the personal tax year - but the conclusions from the model should be the same

• You need to have enough distributable reserves to pay out a dividend. As a rule of thumb, if there is money in your bank after setting aside the right amount for future corporation tax then you can pay out a dividend.

• The exact answer depends on your financial circumstances, e.g. do you have other income sources such as rental income?

What Should I do Next?

Make sure you are set up with the optimal director's salary for your circumstances before the new tax year starts on 6th April 2025! Contact me at hello@alongsideaccounting.com for a free 30-minute consultation.