Overview
Salary, dividends, employer pension contributions and repayment of money you have lent to your company can all play a part in director remuneration. The right combination depends on company profits, cash flow, your other income and your longer-term plans.
This is a historical guide for the tax year from 6th April 2025 to 5th April 2026, reviewed on 13th October 2026. Do not use its figures for 2026/27 planning without checking the applicable rules. You cannot backdate salary, dividends or pension payments simply to achieve a better result for a year that has ended.
Detailed Content
Understand the Company and Personal Tax Costs
Corporation Tax is charged on taxable company profits, whether the remaining money stays in the company or is distributed as dividends.
The small profits rate is generally 19% for qualifying companies with profits of £50,000 or less. The main rate is 25%, with marginal relief potentially available between £50,000 and £250,000. These limits are reduced where there are associated companies or a short accounting period, and some companies cannot use the small profits rate or marginal relief.
Qualifying salary, employer National Insurance and employer pension costs can reduce taxable profits. Dividends do not. Compare the combined company and personal tax cost, rather than considering just one tax.
Choosing a Director’s Salary
There is no single salary that is best for every director. For 2025/26, the standard annual thresholds for a full-year director were:
Employer National Insurance secondary threshold: £5,000.
National Insurance lower earnings limit: £6,500.
Employee National Insurance primary threshold: £12,570.
Standard Personal Allowance: £12,570, subject to eligibility and reduction for higher incomes.
Employer National Insurance normally applied at 15% above £5,000. Standard employee National Insurance applied at 8% above £12,570 up to £50,270, then 2% above that.
A £9,100 salary generated £615 employer National Insurance before any allowance. A £12,570 salary generated £1,135.50. Neither salary generated employee National Insurance under these assumptions. A salary at or above £6,500 would normally support an NI qualifying year through that employment, subject to the director’s circumstances and proper payroll reporting.
These examples assume a full-year directorship and standard NIC treatment. Part-year appointments and other categories can differ. Other income may use the Personal Allowance, so a salary of £12,570 is not automatically free of Income Tax.
The Employment Allowance was £10,500 for eligible employers in 2025/26. A company with only one director cannot claim if that director is also its only employee liable for employer Class 1 National Insurance. Other eligibility conditions apply.
Paying Dividends Correctly
Dividends are paid to shareholders from profits available for distribution, taking account of accumulated losses and the company’s tax position. Money in the bank is not necessarily available for dividends.
For 2025/26, the dividend allowance was £500. Dividend tax rates above the allowance were:
Basic rate: 8.75%.
Higher rate: 33.75%.
Additional rate: 39.35%.
Dividends do not attract National Insurance. The dividend allowance still uses tax-band space.
For illustration, a director with a £12,570 salary, full standard Personal Allowance, no other income and no relevant adjustments could receive £37,700 in dividends before total income reached £50,270. Dividend tax would be £3,255: (£37,700 − £500) × 8.75%. This excludes company Corporation Tax and employer National Insurance and is not a complete remuneration recommendation.
Check the relevant accounts and share rights, record the dividend decision and retain minutes and dividend vouchers. Improper payments can have different legal and tax consequences depending on the facts.
Employer Pension Contributions
Company contributions to a registered pension scheme can be tax-efficient for retirement saving. Qualifying contributions may reduce Corporation Tax and normally do not attract National Insurance or an immediate employment Income Tax charge.
The standard pension annual allowance for 2025/26 was £60,000, covering pension inputs across your schemes, including employer contributions. It could be lower because of high income or certain flexible pension withdrawals. Eligible unused allowance from the previous three tax years may be available.
Employer contributions are not limited to the director’s salary. The relevant-earnings restriction on tax relief for personal contributions is a separate rule. Company tax relief depends on the business-purpose rules and payment timing, and exceeding your available annual allowance can create a personal tax charge.
Pensions are for longer-term saving, not immediate spending. Usually up to 25% can be withdrawn tax-free, subject to your available lump sum allowance, normally £268,275 unless protection or other rules apply. Most remaining withdrawals are taxable. Obtain regulated financial advice where needed before making investment or pension-access decisions.
Director’s Loan Accounts
If you genuinely lent money to the company, repayment of that loan principal is normally not taxable income. Keep supporting records. Money subscribed for shares is not automatically a repayable loan, and interest has separate tax treatment.
If you borrow from the company, additional rules apply. For relevant close-company loans made during 2025/26 to shareholders or other participators, a Section 455 charge of 33.75% could arise where the loan remained unpaid beyond nine months after the Corporation Tax accounting period ended. The tax payment deadline is nine months and one day after that period end.
Later repayment may allow the company to claim relief, but recovery is not immediate. Temporary repayments followed by further borrowing can fall within anti-avoidance rules.
If aggregate relevant loans exceed £10,000 at any point in the tax year, interest below HMRC’s official rate may also create a taxable benefit and employer Class 1A National Insurance. Review loans throughout the year, not just at year end.
Company Cars and Other Benefits
A fully electric company car had a 3% benefit-in-kind percentage in 2025/26. For a car with a £40,000 taxable list price, available for the full year without adjustments, the taxable benefit was £1,200. At an assumed 40% marginal Income Tax rate, the director’s tax was £480, with £180 company Class 1A National Insurance at 15%.
Actual costs depend on your tax rate, vehicle, availability and acquisition arrangements. Qualifying new and unused electric cars may receive a 100% first-year capital allowance, subject to purchase timing and conditions. Used electric cars do not qualify for that same allowance. Low benefit tax does not make an unaffordable car a sensible purchase.
Other benefits, such as private medical insurance, may create personal tax and employer National Insurance liabilities. Compare the full cost before choosing them.
Qualifying trivial benefits can be exempt where each benefit costs £50 or less, including VAT, and is not cash, a cash voucher, contractual, salary sacrifice or a reward for work. Close-company directors are subject to a £300 annual cap. Some non-cash gift vouchers can qualify, but the conditions must be checked.
Step by Step Procedure
Check the year and records. Confirm which tax year applies and bring bookkeeping, payroll and loan accounts up to date.
Review personal circumstances. Include other income, allowances, pension inputs and how much money you need personally.
Compare remuneration options. Model salary, employer National Insurance, dividends and qualifying pension contributions together.
Check available profits and cash. Allow for salary and pension costs, tax, existing liabilities and a sensible business cash reserve before paying dividends.
Keep proper paperwork. Process payroll, document dividends and retain pension and loan records.
Monitor loans and deadlines. Plan genuine repayments in good time and check reporting obligations.
Review regularly. Use current-year rules for new decisions; do not assume last year’s figures still apply.
Frequently Asked Questions And Answers
What was the best director’s salary for 2025/26?
There was no universal answer. £9,100 was not the employer NI threshold for that year. A £12,570 salary could be favourable in common circumstances, but other income, Employment Allowance, company tax rates and personal needs could change the result.
Can I take dividends whenever the company has cash?
No. The company needs sufficient profits available for distribution, supported by relevant accounts. Cash from a loan or unpaid tax provision is not automatically dividend money.
Can my company pay more into my pension than my salary?
Yes, employer contributions are not capped by your salary. Check available annual allowance, existing pension inputs, possible tapering or money purchase restrictions, company tax relief and affordability.
Is borrowing from my company a tax-free alternative to salary?
Not as a permanent extraction strategy. An overdrawn loan can create company tax charges and personal benefit tax. Repayment of money you previously lent to the company is a different situation.
Can I still change what I paid myself in 2025/26?
You should not backdate new transactions. Genuine errors may need correcting through the proper accounting, payroll or tax-return process. Get advice on what actually happened and the correct treatment.
How can 360 Accounts help?
360 Accounts can review company accounts, payroll, dividends and director’s loan records, explain the relevant tax implications and help you plan an appropriate remuneration approach. Where pension or insurance decisions require regulated financial advice, involve a suitably authorised adviser.
This article provides general historical tax information. Individual circumstances, legal requirements and current-year rules must be checked before acting.