Dividends v salary -what’s the best mix for 2025/26?

As we move through the 2025/26 tax year, many company directors are once again weighing up the best way to extract income from their business. With evolving tax rules, national insurance changes and the upcoming implementation of Making Tax Digital, reviewing your salary and dividend strategy is more important than ever.

The Basics – salary v dividends
A salary is paid through PAYE and subject to income tax and national insurance contributions (NICs).

Dividends, on the other hand are payments made from company profits after corporation tax and are taxed at lower rates.

For many directors, a combination of the two remains the most tax efficient method. However, the best mix depends on your income level, personal circumstances and the wider tax landscape.

Key Changes in 2025/26

• The dividend allowance remains at £500 for the 2025/26 tax year (down from £1,000 in 2023/24) meaning more of your dividend income will now be taxable.
• The rates for dividend tax remain at 8.75% (basic rate), 33.75% (higher rate) and 39.35% (additional rate).
• Employer’s national insurance rose to 15% in 2025/26, making salaries more expensive for companies, although the employer’s allowance has increased to £10,500.
• The personal allowance of £12,570 and basic rate threshold of £50,270 are still frozen, bringing more taxpayers into higher brackets due to wage inflation.

So what’s the smart strategy?

Most directors continue to pay themselves a small salary up to the personal allowance or the NIC threshold to qualify for state pension credits and remain tax efficient.  For 2025/26 the secondary threshold for employer NICs has dropped to £5,000 meaning more of the salary is now caught by employer’s NIC.  This makes planning even more critical than in previous years.

Dividends remain a tax efficient option for profits above the salary threshold, though the reduced allowance means the benefit is shrinking. If your business can afford it, you may consider looking at other tax efficient remuneration such as pension contributions.

With increased complexity and reduced allowances, now is the time to review your income strategy. We can help you calculate the most efficient mix of salary and dividends for your circumstances and ensure you're making the most of available reliefs and allowances.

Get in touch with your Swindells partner to book a review.