The standard advice for director-shareholders has been consistent for years: pay yourself a salary up to the National Insurance secondary threshold, take the rest as dividends. That advice still holds - but the threshold has changed, and the cost of getting the salary wrong is now higher than it was. From April 2025, the Employer NI threshold dropped from £9,100 to £5,000, and the rate rose from 13.8% to 15%. Both changes matter for working out the optimal split.
What changed in April 2025
Two Employer NI changes took effect from 6 April 2025:
| Parameter | 2024/25 | 2025/26 |
|---|---|---|
| Employer NI rate | 13.8% | 15% |
| Secondary threshold (per employee) | £9,100 | £5,000 |
| Employment Allowance (max) | £5,000 | £10,500 |
For most sole director companies without employees, the Employment Allowance is not available; it was restricted to companies with more than one director on the payroll, or companies with at least one other employee, from April 2020. So the threshold drop from £9,100 to £5,000 directly increases the Employer NI bill for any salary above £5,000.
⚠️ Employment Allowance eligibility: If your company has only one director and no other employees, the Employment Allowance is not available. The £10,500 increase only benefits practices with two or more employees on payroll.
The optimal salary level for 2025/26
For a sole director company without the Employment Allowance, the optimal salary is now £5,000 per year, exactly at the new secondary threshold. This preserves the National Insurance credit toward State Pension qualification (which requires earnings at or above the Lower Earnings Limit of £6,500). To be precise:
The Lower Earnings Limit (LEL) for 2025/26 is £6,500 per year. A salary of £5,000 falls below the LEL, which means no State Pension credit year is earned at that level. For directors who care about qualifying years, the correct optimal salary is £6,500 - paying a small amount of Employee NI but earning the qualifying year. For those who already have sufficient qualifying years or are not concerned, £5,000 is marginally cheaper.
| Employer NI | £0 |
| Employee NI | £0 |
| Income tax on salary | £0 |
| CT deduction (19%) | −£950 |
| Net cost to company | £4,050 |
No NI qualifying year.
| Employer NI (15% × £1,500) | £225 |
| Employee NI (8% × £0*) | £0 |
| Income tax on salary | £0 |
| CT deduction (19% × £6,725) | −£1,278 |
| Net cost to company | £5,447 |
*Employee NI threshold is £12,570. Earns State Pension qualifying year.
The extra £1,397 net cost of Option B buys a qualifying year toward the new State Pension (currently worth approximately £328 per year in retirement, index-linked). Over a 20-year retirement, that's around £6,500 in today's money - significantly more than the cost. For most directors who still need qualifying years, Option B is the right choice.
The full picture: salary plus dividends
Assuming a director with no other income, a salary of £6,500, and profit available for extraction after CT, the dividend tax rates for 2025/26 are:
| Dividend band | Rate | Applies to |
|---|---|---|
| First £500 (dividend allowance) | 0% | All taxpayers |
| Basic rate (total income up to £50,270) | 8.75% | After salary + dividend allowance fills basic band |
| Higher rate (£50,271 – £125,140) | 33.75% | Dividend income in higher rate band |
| Additional rate (above £125,140) | 39.35% | Dividend income above £125,140 |
The personal allowance of £12,570 offsets the salary, so a director on £6,500 salary has £6,070 of personal allowance remaining. The first £6,070 of dividends is tax-free (absorbed by the remaining personal allowance). The next £500 is covered by the dividend allowance. After that, dividends are taxed at 8.75% up to the basic rate limit.
| Salary: £6,500 | CT rate: 19% (small profits) | Profit after CT available for dividends | |
| Company profit | £80,000 |
| Salary (deductible) | −£6,500 |
| Employer NI (deductible) | −£225 |
| Taxable profit for CT | £73,275 |
| Corporation Tax (19%) | £13,922 |
| Profit after CT | £59,353 |
| Director receives: salary | £6,500 |
| Director receives: dividends (all profit after CT) | £59,353 |
| Personal allowance offset | −£12,570 |
| Dividend allowance | −£500 |
| Taxable dividends at 8.75% | £46,283 |
| Dividend tax | £4,050 |
| Employee NI | £0 |
| Total tax (CT + dividend + Employer NI) | £18,197 |
That's an effective total tax rate of 22.7% on the original £80,000: a combination of 19% small profits CT and 8.75% basic rate dividend tax, offset by deductions and allowances. This is why the salary-plus-dividends structure remains highly efficient for smaller companies.
Where it breaks down: the higher rate boundary
Once total income (salary + dividends) exceeds £50,270, dividends enter the higher rate band at 33.75%. For most director-shareholders, this is the point where simple maximisation of dividends stops being the right strategy and more active planning is needed.
Common approaches at this level include:
- Splitting dividend income between a spouse or civil partner (genuine shareholding required. HMRC's settlements legislation at s625 ITTOIA 2005 applies if the arrangement lacks commercial reality)
- Pension contributions made directly by the company. No CT on the premium, no NI, no personal income tax. The most efficient extraction route for higher earners.
- Leaving profit in the company if the higher rate tax cost of extraction exceeds the benefit of accessing the cash
✓ Pension efficiency: An employer pension contribution of £10,000 costs the company £10,000 (fully deductible), saves £1,900 in CT (at 19%), and reaches the director's pension pot with no personal income tax or NI at any point. The equivalent net benefit from taking the same amount as a dividend in the higher rate band would be approximately £6,625 after 33.75% tax.
The key numbers to hold for 2025/26
| Threshold | Amount |
|---|---|
| Personal allowance | £12,570 |
| Employer NI secondary threshold | £5,000 |
| Lower Earnings Limit (State Pension qualifying) | £6,500 |
| Dividend allowance | £500 |
| Basic rate limit (income tax) | £50,270 |
| Higher rate dividend tax rate | 33.75% |
| CT small profits rate (up to £50,000 profit) | 19% |
| CT marginal relief band | £50,001 – £250,000 |
💡 Rooby tip: Rooby tracks your clients' Corporation Tax liabilities against actual Xero profit figures in real time - so when you're reviewing a client's extraction strategy, you already know their CT position before the conversation starts.
What to review before year end
The salary/dividend split is not a set-and-forget decision. Three things are worth reviewing in Q3 of each tax year (January–March), before the year end creates fixed facts:
- Profit trajectory: If profit will stay below £50,000, the 19% small profits rate is locked in and dividends remain efficient. If profit is heading toward the marginal band, the analysis changes.
- Dividend cumulation: Has the director received dividends from other sources? A separate investment portfolio or other company shareholding reduces the headroom before the higher rate kicks in.
- Pension headroom: Annual allowance is £60,000 (2025/26), tapering above adjusted income of £260,000. If there's unused allowance from prior years (carry-forward rules apply for three years), a larger employer contribution before year end can be highly efficient.
The optimal split calculation isn't complex - but it does require current numbers, not estimates from six months ago. The closer you work to real-time figures, the better the advice you can give.
Rooby connects to Xero and keeps Corporation Tax, VAT, and Self Assessment liabilities current, so extraction planning starts from accurate numbers.