Salary vs dividends in 2025/26 — the £500 decision Ltd directors get wrong every year

For every Ltd company director with no other employees, two recent changes have moved the optimum salary/dividend split: the dividend allowance dropped to £500, and employer NIC went up to 15% with the secondary threshold cut to £5,000 from April 2025. The “old” optimum salary of £12,570 + dividends to the higher rate is no longer quite right. Here’s what the maths now says.

The five candidate salaries

For a sole-director Ltd (no Employment Allowance — you’re excluded), there are five sensible salary levels to consider:

• £0 — pure dividend extraction
• £6,500 — Lower Earnings Limit (counts toward State Pension, no NIC)
• £9,100 (old) — was the secondary threshold, but irrelevant from April 2025
• £12,570 — full personal allowance, no income tax
• £50,270 — full basic-rate band on salary alone

For 99% of typical sole-director cases, the choice is between £6,500 and £12,570 in salary, with the rest as dividends.

The £12,570 vs £6,500 decision (sole director, no other employees)

From April 2025, employer NIC kicks in at £5,000 of salary (was £9,100). So a £12,570 salary triggers £7,570 of employer-NIC-able pay at 15% = £1,135 employer NIC.

The CT relief on the £12,570 salary at 25% (assuming you’re in the marginal band over £50k profit) = £3,142 saved CT.

Net company saving: £3,142 − £1,135 = £2,007 on the £12,570 salary structure.

Compare to taking £6,500 salary (no NIC, full personal allowance unused above the salary):

• CT relief on £6,500 = £1,625 saved
• £6,070 of personal allowance still unused
• Wages portion of dividend extracted on top — first £6,070 covered by personal allowance, then £500 dividend allowance, then 8.75% on dividends

For most sole directors with profits over £50k, the £12,570 salary still wins, but by a slimmer margin than pre-April 2025. Roughly £200–£400/year better off vs £6,500. Not nothing, but a real reduction from the £600+/year advantage it used to have.

What changes the answer

• Spouse / family member also drawing salary — Employment Allowance becomes available (£10,500/year against employer NIC) once you have at least one other employee. Tilts £12,570 salary further into the lead.
• Multiple directors — same logic; Employment Allowance unlocks bigger savings.
• Profit under the £50k Corporation Tax small-profits rate boundary — CT is 19% rather than 25%, so each £ of CT-deductible salary saves less. Tighter.
• Profit over £250k — straight 25% CT, salary deduction more valuable.
• Need State-Pension-qualifying earnings — minimum salary should be £6,500+ to count for that year’s contribution. Don’t fall below this.

Pension contributions — the third lever

Often overlooked: an employer pension contribution is corporation-tax-deductible, no employer or employee NIC, and grows tax-free in the pension. For a director who’s not yet maxed their £60k annual allowance:

• £10,000 employer pension contribution costs the company £10,000 cash
• Saves CT at 19–25% = £1,900–£2,500
• £10,000 lands in the pension. Compare to taking £10,000 as dividend post-CT: you’d net £6,750 (after 25% CT and 8.75% dividend tax)
• Net advantage: £3,250 in this slice — and you’ve reserved your 25% tax-free lump sum at age 57+.

If you don’t need the cash now, employer pension contribution beats dividends every time below the £60k annual allowance.

Worked example — typical sole director, £100k profit, full extraction

Director takes £12,570 salary + dividends to land at the higher-rate threshold of £50,270. Total dividends gross of £37,700.

• Employer NIC on salary: £1,135
• CT on (£100k – £12,570 – £1,135) = £86,295 at marginal rates: ~£18,800
• Distributable cash: £67,495 — but director only takes £37,700
• Dividend tax: (£37,700 – £500 allowance) × 8.75% = £3,255
• Total tax + NIC: £23,190. Director’s net: £37,700 dividend – £3,255 dividend tax + £12,570 salary = £47,015

If the director needs cash above £50,270, every additional £1,000 of dividend costs 33.75%. If they don’t need it, leave it in the company at 19–25% CT and either pay employer pension contribution or retain for future projects.

Key takeaways

• For 2025/26 sole directors with profits above £50k, the optimal salary is still £12,570 — but the advantage over £6,500 has narrowed.
• Employer NIC at 15% on salary above £5k changes the maths from previous years.
• Adding a second employee (e.g. spouse) unlocks £10,500 of Employment Allowance — meaningful enough to be worth structuring for.
• Employer pension contributions beat dividends for any cash you don’t need now (under £60k AA limit).
• Above the higher-rate threshold, every extra £1k of dividend costs 33.75% in tax. Retain or contribute to pension instead.

FAQ

Last year’s salary/dividend mix is probably no longer optimal. Book a free 20-min review and we’ll model your specific extraction strategy for 2025/26 in 15 minutes. Helpful for any UK Ltd director.