How to Optimise Your Salary and Dividends as a Company Director

One of the main tax advantages of operating through a limited company is the flexibility to determine how you extract profits. Rather than paying all remuneration as salary (which attracts income tax and National Insurance), directors can take a combination of salary and dividends. Getting this right can significantly reduce your overall tax burden — but the optimal combination has become more nuanced as dividend and NI rates have changed.

Why the Combination Works

Salary is an allowable Corporation Tax deduction for the company, reducing the CT bill. Dividends are paid from post-CT profits and do not attract NI. The tax rates on dividends (8.75%, 33.75%, 39.35%) are lower than equivalent income tax rates, and there is no NI on dividends at all. The art is in balancing salary to optimise the CT deduction and NI position while using dividends to extract remaining profits at the lowest overall rate.

Scenario 1: Sole Director, No Employment Allowance

If you are a sole director with no other employees, you cannot claim the Employment Allowance. The most tax-efficient salary is typically the NI Secondary Threshold (£9,100 for 2025/26). At this level, neither employee nor employer NI is triggered. Remaining profits are extracted as dividends. The salary of £9,100 saves CT of £2,275 (25%) while generating no NI cost.

Scenario 2: Director with Employees, Employment Allowance Available

If you have at least one non-director employee, you can claim the Employment Allowance (up to £10,500 from April 2025). This covers most or all of the employer NI on a salary up to the Personal Allowance (£12,570). Taking a salary of £12,570 saves more CT (£3,143 at 25%) while the employer NI (£469 on the excess above £9,100) is absorbed by the Employment Allowance. Remaining profits are extracted as dividends, with the full Personal Allowance sheltering the salary from income tax.

Dividend Extraction

After the optimal salary, extract remaining profits as dividends. The first £500 is covered by the Dividend Allowance (0%). Dividends up to the higher rate threshold (total income £50,270) are taxed at 8.75%. If your salary plus dividends will push you above £50,270, model the higher rate dividend tax carefully — 33.75% is significantly higher than the basic rate. For director-shareholders with larger profit levels, consider retaining some profits in the company rather than extracting everything each year.

Dividend Timing

Dividends can only be paid from retained profits — the company must have distributable reserves. Declare dividends before year end where possible to use the Dividend Allowance and basic rate band for the current tax year. A dividend paid after 5 April falls into the following tax year. Board minutes declaring the dividend should be prepared and stored.

Review Annually

The optimal strategy changes as rates change and as your income changes. Review annually with your accountant, particularly as: employer NI rate increased to 15% from April 2025; the Employment Allowance increased to £10,500; dividend tax rates and allowances continue to be adjusted. Model the numbers each year before the start of the tax year rather than deciding at year end with hindsight.