Key Changes for 2025-26
The 2025-26 tax year brings substantial changes that affect the optimal salary vs dividend balance:
Major Changes:
- Employer National Insurance rate increased from 13.8% to 15%
- Secondary threshold reduced from £9,100 to £5,000 annually
- Employment Allowance increased from £5,000 to £10,500
- Employment Allowance £100,000 restriction lifted
- Dividend allowance remains at £500
Current Tax Rates and Thresholds
National Insurance Rates 2025-26
| Category | Rate | Threshold |
|---|---|---|
| Employee NI (Primary) | 8% (up to £50,270), then 2% | £12,570 annually |
| Employer NI (Secondary) | 15% | £5,000 annually |
| Employment Allowance | Up to £10,500 | For eligible businesses |
Dividend Tax Rates 2025-26
| Tax Band | Rate | Income Range |
|---|---|---|
| Basic Rate | 8.75% | Up to £50,270 |
| Higher Rate | 33.75% | £50,271 - £125,140 |
| Additional Rate | 39.35% | Over £125,140 |
Corporation Tax Rates 2025
| Profit Level | Rate | Notes |
|---|---|---|
| Up to £50,000 | 19% | Small profits rate |
| £50,001 - £250,000 | 25% with marginal relief | Tapered rate |
| Over £250,000 | 25% | Main rate |
Optimal Salary Strategies for 2025-26
Option 1: Sole Directors (No Employment Allowance)
For companies with sole directors and no other employees, the optimal salary is £5,000 annually (£417 per month).
Salary: £5,000 per year
- Employee NI: £0 (below £12,570 threshold)
- Employer NI: £0 (at the £5,000 threshold)
- Income Tax: £0 (below personal allowance)
- Corporation Tax relief: £950 (£5,000 × 19%)
- Net cost to company: £4,050
Option 2: Companies with Employment Allowance
Companies with employees or multiple directors may benefit from the £12,570 salary strategy if they can claim Employment Allowance.
Salary: £12,570 per year
- Employee NI: £0 (at threshold)
- Employer NI: £1,135.50 (but offset by Employment Allowance)
- Income Tax: £0 (at personal allowance)
- Corporation Tax relief: £2,388 (£12,570 × 19%)
- Net cost to company: £10,182
Worked Example: £100,000 Profit Extraction
Scenario A: Sole Director Strategy
Salary: £5,000 + Dividends: £95,000
Salary Costs:
- Gross salary: £5,000
- Employer NI: £0
- Corporation tax relief: £950
- Net salary received: £5,000
Dividend Calculation:
- Available for dividends: £95,950 (after salary and corporation tax)
- Corporation tax on remaining profit: £18,230 (£95,950 × 19%)
- Available for distribution: £77,720
- Dividend tax: £6,732 ((£77,720 - £500) × 8.75%)
- Net dividend received: £70,988
Total:
- Total received: £75,988
- Total tax and NI: £24,962
- Effective rate: 24.96%
Scenario B: Employment Allowance Strategy
Salary: £12,570 + Dividends: £87,430
Salary Costs:
- Gross salary: £12,570
- Employer NI: £1,136 (offset by Employment Allowance)
- Corporation tax relief: £2,388
- Net salary received: £12,570
Dividend Calculation:
- Available for dividends: £89,818
- Corporation tax: £17,065
- Available for distribution: £72,753
- Dividend tax: £6,322 ((£72,753 - £500) × 8.75%)
- Net dividend received: £66,431
Total:
- Total received: £79,001
- Total tax and NI: £23,387
- Effective rate: 23.39%
Common HMRC Traps to Avoid
⚠️ Key Compliance Issues:
- IR35 Rules: Ensure genuine employment status if contracting through a limited company
- Dividend Documentation: Proper board resolutions and dividend vouchers required
- Sufficient Profits: Cannot declare dividends exceeding distributable reserves
- Equal Treatment: Dividends must be paid proportionally to shareholdings
- Employment Allowance Eligibility: Cannot claim if only director/family members employed
When Higher Salaries Make Sense
Consider a higher salary strategy if:
- Pension contributions: Higher earnings increase annual allowance capacity
- Mortgage applications: Lenders often prefer salary income over dividends
- Maternity/paternity pay: Benefits based on salary levels
- State pension entitlement: National Insurance credits protect future benefits
- Childcare vouchers: Salary sacrifice schemes require employment income
Record Keeping Requirements
HMRC requires comprehensive documentation:
For Salaries:
- Employment contracts and service agreements
- Payroll records and RTI submissions
- P60 and P11D forms
- PAYE and National Insurance calculations
For Dividends:
- Board meeting minutes authorising payments
- Dividend vouchers with tax credits
- Company accounts showing distributable reserves
- Shareholder resolutions if required
When to Seek Professional Advice
Consider professional guidance if:
- Company profits exceed £100,000 annually
- Multiple shareholders with different tax positions
- International tax implications
- Complex group structures or associated companies
- Significant pension or property investments
- IR35 or employment status concerns
Need Help Optimising Your Salary and Dividend Strategy?
Our qualified accountants can calculate your optimal profit extraction strategy and ensure full HMRC compliance. Book a free consultation to discuss your specific circumstances.