If you run your own limited company, one of the questions that comes up every year is simple on the surface but surprisingly nuanced in practice:
How should you pay yourself?
Most owner-managed businesses use a combination of salary, dividends and pension contributions. The right mix often depends on profits, cashflow, tax thresholds and sometimes even things happening at home, such as child benefit or student loan repayments.
Below is a practical overview of the main considerations for the 2025/26 tax year.
The Key Tax Numbers That Shape Decisions
A few core thresholds tend to drive most income planning decisions.
For 2025/26, the main figures are:
Personal allowance: £12,570
Basic rate tax band: up to £50,270
Higher rate tax band: £50,271 to £125,140
Additional rate: over £125,140
Once income exceeds £100,000, the personal allowance begins to taper away.
These thresholds are often the starting point when modelling how much salary or dividends to take.
How Salary Fits Into the Picture
Salary still plays an important role, even for company directors who mainly draw dividends.
A salary can:
Use your personal allowance in a predictable way
Create “earned income”, which can matter for pension contribution limits
Help maintain entitlement to certain state benefits
However, National Insurance has become more relevant in recent years.
For 2025/26, employee NI starts once earnings exceed £12,570, while employer NI starts at £5,000 and is charged at 15%.
This means a salary set around the personal allowance can still create an employer NI cost unless reliefs such as Employment Allowance apply.
Dividends: Flexible but Not Always the Whole Answer
Dividends are often used to top up income once a base salary has been set.
One advantage is that dividends do not attract National Insurance. However, they are taxed differently from salary.
For 2025/26:
Dividend allowance: £500
Basic rate dividend tax: 8.75%
Higher rate: 33.75%
Additional rate: 39.35%
It’s also important to remember that dividends are paid from profits after corporation tax. So while they can still be efficient, the overall tax position depends on both company tax and personal tax.
Another practical point is that dividends can only be paid when a company has distributable profits.
Pensions: Often the Most Tax-Efficient Option
For many business owners, pension contributions sit alongside salary and dividends as part of a long-term strategy.
Employer pension contributions can be particularly efficient because they may:
Reduce corporation tax for the company
Avoid National Insurance
Help build long-term retirement savings
The annual pension allowance is £60,000 for 2025/26, although high earners may face tapered limits.
For directors who mainly take dividends, employer contributions from the company can often be more flexible than personal contributions.
The Thresholds That Often Change the Answer
In practice, planning usually revolves around a few key income levels.
For example:
Around £50,270 - This is where higher-rate tax begins.
Around £60,000 - This is where the High Income Child Benefit Charge begins.
Around £100,000 - This is where the personal allowance starts to taper away.
Around £125,140 - This is where the additional tax rate begins.
If your total income approaches any of these levels, it can significantly affect the most efficient mix of salary, dividends and pension contributions.
Household Factors That Often Get Overlooked
Income planning is not just about business tax.
Other factors can influence the best approach, including:
the High Income Child Benefit Charge, which begins when adjusted net income exceeds £60,000
student loan repayments, which are calculated based on total income reported through self assessment
household income levels if both partners work.
Dividends form part of adjusted net income, so they can affect these calculations.
A Simple Year-End Checklist
If you want to review your position before the end of the tax year, these steps usually provide the most value:
Forecast your total personal income for the year
Check whether you are close to key tax thresholds
Confirm whether your company qualifies for Employment Allowance
Check distributable reserves before declaring dividends
Review pension contribution opportunities
Consider household factors such as child benefit or student loans.
A short forecast before 5 April can often highlight whether a small change in timing or structure could improve the overall position.
Final Thought
There isn’t a single “correct” way to pay yourself from a business.
Most of the time, the best approach is a balanced combination of salary, dividends and pensions, adjusted each year as profits and personal circumstances change.
Taking a little time to review the numbers before the end of the tax year can often bring useful clarity.
Want the Full Pay Guide?
This article highlights the main ideas, but the full Salary, Dividends and Pensions Pay Guide explains the rules, thresholds and planning considerations in more detail.
The guide includes:
Key 2025/26 tax thresholds
Dividend and salary comparisons
Pension contribution planning
Household tax considerations
A practical checklist for owner-managed businesses
If you'd like help reviewing your own numbers, we can also run a quick scenario using your year-to-date figures and expected drawings before the tax year ends.