Salary and dividend split — questions answered
What this page covers
Direct answers to the most common questions UK contractors and limited company directors ask about salary and dividend splits — the exact 2025/26 figures, worked examples, legal requirements, and the mistakes that cost contractors thousands every year.
What is the optimal salary and dividend split for 2025/26?
Direct Answer
For 2025/26, most limited company directors pay themselves a salary of £12,570 (the full personal allowance) and take the remainder as dividends. This avoids income tax on the salary entirely. The first £500 of dividends is tax-free; dividends above that are taxed at 8.75% (basic rate) — versus the 20–40% income tax you would pay on salary. On a £50,000 total draw, this saves approximately £8,200 per year versus salary alone.
Why is salary plus dividends more tax-efficient than salary alone?
Salary attracts both Income Tax and National Insurance — employee and employer contributions.
Dividends come from post-corporation-tax profits — no NI on dividends at all.
Dividend tax rates (8.75% basic rate) are far lower than income tax rates on equivalent salary.
Entirely legal — standard practice recommended by every contractor accountant in the UK.
What are the 2025/26 key figures?
| Item | 2025/26 figure |
|---|---|
| Personal Allowance | £12,570 |
| Dividend Allowance (tax-free) | £500 |
| Basic rate dividend tax (up to £50,270 total income) | 8.75% |
| Higher rate dividend tax (£50,271–£125,140) | 33.75% |
| Additional rate dividend tax (over £125,140) | 39.35% |
| Employer NI secondary threshold | £9,100 |
| Corporation tax (profits up to £50,000) | 19% |
| Corporation tax (profits over £250,000) | 25% |
Should I take a salary of £12,570 or £9,100?
Salary at £12,570
No employee Income Tax or employee NI
Employer NI due on portion above £9,100 (~£479/year) — but deductible against corporation tax
Best for: Companies eligible for Employment Allowance
Salary at £9,100
No Income Tax, no employee NI, no employer NI
Sacrifices £3,470 of personal allowance — costs ~£694 extra in corporation tax at 19%
Best for: Sole director companies not eligible for Employment Allowance
Worked example: £50,000 total draw in 2025/26
Using the optimal salary and dividend split:
Salary £12,570 → Income Tax: £0, Employee NI: £0
Dividends £37,430 → First £500 tax-free, remaining £36,930 at 8.75% = £3,231
Total personal tax: ~£3,231
Salary-only equivalent: Income Tax ~£7,486 + NI ~£3,946 = ~£11,432
Estimated annual saving: ~£8,200
How much can I pay myself in dividends?
You can only pay dividends from distributable profits — the company's post-corporation-tax retained profits. There is no fixed upper limit, but you cannot pay more than the available distributable profits. Before declaring a dividend: calculate the company's profit, deduct the corporation tax liability, and only pay dividends from what remains. Paying dividends when there are insufficient profits is an unlawful dividend — a legal debt owed back to the company.
Do I need a board minute every time I pay a dividend?
Yes — every dividend payment requires a board minute (a written record of the decision to declare the dividend) and a dividend voucher (showing the amount per share, date, and total). These are legal requirements. Without them, HMRC can treat payments as salary — triggering Income Tax and National Insurance on the full amount, plus interest and penalties.
What happens when I earn over £50,270?
Once total income exceeds £50,270, dividends above that threshold are taxed at 33.75% — more than triple the basic rate. At this point the most tax-efficient strategy shifts. Your accountant may recommend:
Employer pension contributions — fully deductible against corporation tax, no Income Tax or NI, and brings taxable income below the higher-rate threshold.
Retaining profits in the company to extract in future years at a lower rate.
Paying a dividend to a spouse if they have unused allowance — subject to HMRC's settlements legislation.
Can I pay dividends to my spouse?
Yes, if your spouse or partner is a genuine shareholder. Paying dividends to a lower-earning spouse can reduce your household tax bill significantly. However, HMRC's settlements legislation applies — the arrangement must have a genuine commercial basis, not be set up purely to reduce tax. Your spouse must hold shares in their own right, not as a nominee. This strategy requires careful setup and ongoing compliance — always take professional advice before implementing it.
What are the most common mistakes contractors make?
Paying dividends when there are insufficient distributable profits — an unlawful dividend
Forgetting to record board minutes and dividend vouchers every time
Not accounting for corporation tax before declaring dividends
Ignoring the dividend allowance reduction — £2,000 until 2023, then £1,000, now £500
Taking all income as salary instead of optimising the split
Not reviewing the optimal salary level each tax year as thresholds change
Does my company qualify for Employment Allowance?
The Employment Allowance allows eligible companies to reduce their employer National Insurance bill by up to £10,500 per year (2025/26). Sole director companies with no other employees are not eligible — this exclusion was introduced in April 2020. If you employ at least one other person (including a spouse), the company qualifies. The Employment Allowance changes the optimal salary strategy: sole directors not eligible are sometimes better served by a £9,100 salary (zero NI), while companies with employees are better served by a £12,570 salary (employer NI fully offset by the allowance). Your accountant confirms eligibility and claims it through payroll.
Can I pay myself less than minimum wage as a company director?
Yes — the National Minimum Wage does not apply to company directors paid via dividends rather than a worker's wage. As a director, you are not a worker for NMW purposes when it comes to your director's remuneration. The standard £12,570 salary is below the full-time NMW equivalent (approximately £23,795 for a 40-hour week at £11.44/hour), but this is entirely legal for a director. HMRC has confirmed this position. The salary is set at £12,570 (or £9,100) specifically to match tax thresholds, not employment law minimum wage requirements.
How do I physically pay myself salary and dividends?
Two separate transfers from your company bank account. First, salary: set up a standing order from the company account to your personal account for the monthly salary amount (£1,047.50/month for a £12,570 annual salary). Run payroll through your payroll software or ask your accountant to process it — they will calculate any PAYE and NI due and file the RTI submission to HMRC. Second, dividends: a separate bank transfer on each date you declare a dividend. The amount varies based on your profit position. Keep the bank reference clear — "salary" for the salary payment and "dividend" for dividend payments — to make your bookkeeping clean.
Can I vary my salary mid-year?
Yes, but it requires a formal payroll change and careful consideration of the tax implications. Changing your salary part-way through the year affects your PAYE calculations, any student loan repayments, and potentially your NI record for the year. If you want to change your salary, do it from the start of a new tax year (6 April) wherever possible — it is much simpler. If you need to change mid-year, tell your accountant in advance so they can adjust the payroll correctly. Never just change the standing order amount without updating the payroll — HMRC receives RTI data monthly and will flag the discrepancy.
Is taking salary and dividends legal?
Direct Answer
Yes — entirely legal. Taking a combination of salary and dividends from a limited company is standard practice for UK contractors and company directors. It is recommended by accountants, accepted by HMRC, and has been the norm for limited company owners for decades. The key requirements are that the company has sufficient distributable profits, proper records are maintained, and the strategy is administered correctly — which is why most contractors use a specialist accountant.
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