For company directors, deciding how to pay yourself is a key financial decision. Most directors benefit from a combination of salary and dividends.

However, the rules continue to change, so finding the right balance requires careful consideration from one year to the next and guidance from a trusted adviser can ensure you make the most from your company’s success.

Why the salary level matters

For the 2025/26 tax year, a salary of £12,570 is often the most tax-efficient option. It creates a qualifying year for State Pension purposes while avoiding employee National Insurance in many cases.

Why? It comes down to how the tax and National Insurance (NI) system works.

Let’s break it down:

  • £6,500 is the lower earnings limit for NI. Earning more than this means the year counts towards your state pension.
  • £12,570 is the primary threshold for NI. Go over this, and you’ll have to start paying employee NI contributions.
  • £5,000 is the secondary threshold. Pay yourself more than this, and your company needs to pay employers’ NI at 15 per cent.

So, by paying yourself exactly £12,570, you hit a clever balance:

  • You get a qualifying year for your state pension
  • You avoid paying employee NI
  • The salary is tax-deductible for the company, reducing your Corporation Tax bill

Yes, your company will still pay some employers’ NI – around £1,136 – but this is more than offset by the Corporation Tax saving, which could be between £1,654 and £2,307, depending on the rate you pay.

Dividends and flexibility

Dividends are typically taxed at lower rates than salary and offer flexibility when profits allow.

They can be a sensible way to extract additional income without triggering the same levels of National Insurance.

That said, dividends can only be paid from profits and the paperwork and timing must be handled properly.

However, from April 2026, things become more challenging thanks to the introduction of a new higher rates of taxation for dividends.

From this date, tax rates will increase by two percentage points, raising the ordinary rate to 10.75 per cent and the upper rate to 35.75 per cent, while the additional rate stays at 39.35 per cent, with the £500 dividend allowance remaining unchanged

Looking further ahead to 2029, the Government also intends to introduce a £2,000 cap on the tax-free benefits of salary sacrifice pensions schemes, which have offered business owners another route to reduce the amount of income tax that they pay.

Common mistakes to avoid

Paying too much salary can increase Income Tax and National Insurance unnecessarily.

Paying too little can mean missing out on National Insurance credit for State Pension purposes, depending on your circumstances.

Other common issues include:

  • Taking money without recording it correctly
  • Paying dividends without sufficient profits
  • Missing reporting requirements
  • Forgetting that timing affects personal tax bills

Every business is different. The right approach depends on profits, personal circumstances and long-term plans.

Seymour Taylor provides tailored advice to ensure directors pay themselves tax -efficiently and compliantly. Get in touch to find out more.

This is the sixth article in a series of blogs to guide you through the process of establishing your next business.

Please find the rest of the series below:

Posted in Blog news.