Question 1

What is the optimal salary for a company director in 2025/26?

Accepted Answer

For most single-director companies without Employment Allowance, the optimal salary is £12,570 — the personal allowance threshold. This means zero income tax and zero employee NIC. Directors with EA eligibility (e.g., spouse on payroll) may benefit from a higher salary up to £50,270.

Question 2

Why are dividends more tax-efficient than salary?

Accepted Answer

Dividends don't attract National Insurance (saving 15% employer NIC + 8% employee NIC), and are taxed at lower rates: 10.75% basic rate vs 20% income tax (2026/27). However, salary reduces corporation tax and builds state pension credit, so the optimal balance depends on your numbers.

Question 3

How does employer NIC affect the salary vs dividends decision?

Accepted Answer

Employer NIC at 15% is a significant hidden cost of salary. On £50,000 of salary above the £5,000 threshold, employer NIC costs £6,750. This is why most directors prefer a low salary topped up with dividends — unless Employment Allowance covers the employer NIC.

Question 4

Do I qualify for Employment Allowance?

Accepted Answer

Employment Allowance gives your company up to £10,500 off its employer NIC bill. You qualify unless you're a sole director with no other employees. If your spouse works for the company (even part-time admin), you qualify. From April 2025, the £100k employer NIC cap was removed.

Question 5

Should I pay into a pension through my company?

Accepted Answer

Employer pension contributions are fully deductible for corporation tax and don't attract NIC. This makes them more tax-efficient than paying extra salary or dividends. If your income is near £100,000, pension contributions can restore your personal allowance (effective 60% tax relief).

Salary vs Dividends Calculator 2025/26

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