Dividend vs Salary: The Most Tax-Efficient Split for 2025/26
As a limited company director, you choose how to extract profits: salary, dividends, or a combination. Getting this right can save thousands in tax each year — and it directly affects your CT600.
Why It Matters for Your CT600
Your salary is a deductible business expense that reduces your corporation tax bill. Dividends are paid from post-tax profits and are not deductible. This creates a balancing act:
- Higher salary = lower corporation tax, but higher Income Tax and NIC
- Higher dividends = higher corporation tax, but lower personal tax (usually)
The Optimal Strategy for 2025/26
Step 1: Pay Yourself a Salary at the NIC Threshold
The sweet spot for 2025/26:
| Element | Amount |
|---|---|
| Optimal salary | £12,570/year (£1,047.50/month) |
| Employee NIC | £0 (below Primary Threshold) |
| Employer NIC | ~£621/year |
| Income Tax | £0 (equals Personal Allowance) |
| Corporation tax saved (19%) | £2,506 |
Why £12,570? This is the Income Tax Personal Allowance. You pay zero income tax and zero employee NIC on this amount. It's deductible against corporation tax, saving your company £2,506 (at the 19% small profits rate).
What about Employer NIC? From April 2025, employer NIC is 15% above the Employment Allowance threshold. The Employment Allowance is £10,500, so if this is your only employee cost, employer NIC is covered. For companies without the Employment Allowance (e.g., single-director companies with no other employees earning above the NIC threshold), consider the trade-off.
Step 2: Take Remaining Profits as Dividends
After salary, pay yourself dividends from post-tax profits:
| Dividend Amount | Tax Rate |
|---|---|
| First £1,000 | 0% (Dividend Allowance) |
| £1,001–£37,700 (basic rate) | 8.75% |
| £37,701–£125,140 (higher rate) | 33.75% |
| Over £125,140 (additional rate) | 39.35% |
Worked Example: £60,000 Total Extraction
Company profit before salary: £60,000
| Salary | Dividend | Total | |
|---|---|---|---|
| Gross amount | £12,570 | £44,176* | £56,746 |
| Income Tax | £0 | £3,778 | £3,778 |
| Employee NIC | £0 | N/A | £0 |
| Employer NIC | £0** | N/A | £0** |
| Corporation Tax | – | £8,872 | £8,872 |
| Net to you | £12,570 | £40,398 | £52,968 |
| Total tax paid | £12,650 | ||
| Effective rate | 21.1% |
*After 19% corporation tax on £54,538 profit (£60,000 – £12,570 salary – £2,892 employer NIC = £44,538 taxable; CT = £8,462; available for dividends = £44,176)
**Assuming Employment Allowance covers employer NIC
Comparison: All Salary at £60,000
| Element | Amount |
|---|---|
| Income Tax | £9,486 |
| Employee NIC | £4,764 |
| Employer NIC | £6,550 |
| Corporation Tax | £0 |
| Total tax | £20,800 |
| Effective rate | 34.7% |
Savings from optimal split: £8,150/year (or £679/month)
What This Means for Your CT600
When filing your CT600:
- Box 145 (Turnover): Your total company income
- Box 155-165 (Income): Include ALL income before salary deductions
- Salary deduction: Claimed as a trading expense, reducing taxable profit
- Dividends: NOT reported on CT600 (they're personal income, reported on your Self Assessment)
Your CT600 reflects the company's taxable profit — which is revenue minus expenses (including your salary). Dividends come out of what's left after corporation tax.
Special Considerations
Multiple Directors
If there are two or more directors, each can take the optimal salary. But the £50,000 small profits threshold stays the same regardless of director count.
Student Loan Repayments
If you have a student loan, dividends above the threshold also count towards repayments. Factor this into your calculation.
State Pension Qualification
You need earnings above the Lower Earnings Limit (£6,396 in 2025/26) to qualify for a state pension year. The £12,570 salary comfortably exceeds this.
Upcoming Changes
The Autumn Budget 2025 increased employer NIC to 15% and lowered the Secondary Threshold to £5,000. This makes salary slightly more expensive for companies without Employment Allowance. The dividend vs salary calculation remains favourable to the mixed approach.
The Bottom Line
For most single-director limited companies in 2025/26:
- Salary: £12,570/year
- Dividends: Rest of profits (after corporation tax)
- File Self Assessment for dividend income over £1,000
This structure minimises your combined tax burden and is entirely legitimate. HMRC expects directors to choose the most tax-efficient extraction method.
File Your CT600 Correctly
Getting your salary deduction right on the CT600 is essential. Taxpipe's guided wizard ensures your trading expenses (including director salary) are correctly captured, and calculates your corporation tax liability accurately.
File your CT600 → — £59, includes tax computation and iXBRL accounts.
Related: employer NI and Corporation Tax