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 | ~£1,136/year (15% above £5,000 secondary threshold) |
| Income Tax | £0 (equals Personal Allowance) |
| Corporation tax saving | ~£2,604 (on salary + employer NIC at 19%) |
Why £12,570? This is the Income Tax Personal Allowance. You pay zero income tax and zero employee NIC on this amount. Both the salary and the employer NIC it generates are deductible against corporation tax — a combined deduction of £13,706, saving approximately £2,604 at the 19% small profits rate.
What about Employer NIC? From 6 April 2025, employer NIC is 15% on earnings above the £5,000 Secondary Threshold. On a £12,570 salary that is (£12,570 − £5,000) × 15% = £1,135.50 per year. This cost is deductible for corporation tax. The Employment Allowance of £10,500 is generous — but a company whose only paid employee is its sole director does not qualify. If you have two or more directors or employees on payroll, the allowance can cover this NIC entirely.
Step 2: Take Remaining Profits as Dividends
After salary, pay yourself dividends from post-tax profits:
| Dividend Amount | Tax Rate |
|---|---|
| First £500 | 0% (Dividend Allowance) |
| £501–£37,700 (within basic rate band) | 8.75% |
| £37,701–£112,570 (higher rate, assuming £12,570 salary) | 33.75% |
| Over £112,570 (additional rate, assuming £12,570 salary) | 39.35% |
The dividend allowance is £500 for 2025/26 — it was cut from £1,000 in April 2024. Dividends within the allowance are taxed at 0% but still count towards your tax bands.
Worked Example: £60,000 Company Profit
Company profit before salary: £60,000 (single director, no Employment Allowance)
| Salary | Dividend | Total | |
|---|---|---|---|
| Gross amount | £12,570 | £37,498* | £50,068 |
| Income Tax | £0 | £3,237 | £3,237 |
| Employee NIC | £0 | N/A | £0 |
| Employer NIC (company cost) | £1,136 | N/A | £1,136 |
| Corporation Tax (company cost) | – | £8,796 | £8,796 |
| Net to you | £12,570 | £34,261 | £46,831 |
| Total tax paid | £13,169 | ||
| Effective rate | 22.0% |
*Taxable profit = £60,000 − £12,570 (salary) − £1,136 (employer NIC) = £46,294; CT at 19% = £8,796; post-tax profit available for dividends = £37,498.
Dividend tax = £500 at 0% (allowance) + £36,998 at 8.75% = £3,237. The salary exactly uses the Personal Allowance, so all dividends fall within the basic rate band.
Comparison: All Salary from the Same £60,000 Profit Pool
If the company instead pays out the entire £60,000 as salary and employer NIC, the most gross salary it can afford is £52,826 (because salary + 15% employer NIC above £5,000 must total £60,000):
| Element | Amount |
|---|---|
| Income Tax | £8,562 |
| Employee NIC | £3,067 |
| Employer NIC (company cost) | £7,174 |
| Corporation Tax | £0 |
| Total tax | £18,803 |
| Net to you | £41,197 |
| Effective rate | 31.3% |
Income tax: 20% on £37,700 basic rate band = £7,540, plus 40% on the slice above £50,270 = £1,022, total £8,562. Employee NIC: 8% between £12,570 and £50,270 plus 2% above.
Savings from the optimal split: ~£5,634/year (about £470/month) — and the director takes home £46,831 net from the £60,000 profit pool, versus only £41,197 on all salary.
What This Means for Your CT600
When filing your CT600:
- Box 145 (Total turnover from trade): your company's trading income for the period
- Box 155 (Trading profits): your tax-adjusted profit after deducting all allowable expenses — including your salary and the employer NIC on it. Salary is an expense that reduces this figure. Do not enter income before deducting salary; that would overstate your profit and your tax bill
- Dividends: NOT reported on the CT600 — dividends are personal income, reported to HMRC via your Self Assessment return
Your CT600 reflects the company's taxable profit — revenue minus allowable 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 — and a company with multiple people paid above the Secondary Threshold can usually claim the Employment Allowance, eliminating the employer NIC cost. The £50,000 small profits threshold stays the same regardless of director count (it is divided when there are associated companies).
Student Loan Repayments
If you have a student loan, dividends above a threshold also count towards repayments. Factor this into your calculation.
State Pension Qualification
You need earnings above the Lower Earnings Limit (£6,500 in 2025/26) to qualify for a state pension year. The £12,570 salary comfortably exceeds this.
The April 2025 Employer NIC Changes
The Autumn Budget 2024 increased employer NIC to 15% and lowered the Secondary Threshold from £9,100 to £5,000, both effective from 6 April 2025. This made salary more expensive for companies that cannot claim the Employment Allowance. The dividend vs salary calculation still strongly favours 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 £500 (the dividend allowance)
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 trading profit right on the CT600 is essential — it should already reflect your salary and employer NIC as deductions. Taxpipe's guided wizard ensures your expenses 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