Owner-managed companies have long weighed salary versus dividend when taking profits. That choice has shifted again for 2025/26. Employee National Insurance (NIC) remains at 8% on earnings between the primary threshold and the upper earnings limit, while the employer NIC rate has risen to 15% and the secondary threshold has dropped to £5,000. Employment Allowance has increased to £10,500 for eligible employers – a material offset if you have staff – but it still does not apply to one-person companies where the sole employee is the director (HMRC, 2025/26). Dividends are still taxed at 8.75%, 33.75% and 39.35%, and the dividend allowance remains just £500, extending tax to many more investors (HMRC; Autumn Budget Annex A, 2024). Meanwhile, inflation is running at 3.8% on the CPI measure, keeping a squeeze on operating costs and cashflow (ONS, 2025).
In this owner-manager tax planning guide, we explain the practical trade-offs for 2025/26, run sample numbers at different profit levels, and highlight when a salary, dividend or blend makes most sense. If you want tailored figures for your company, please get in touch and we’ll run the numbers for you.
What changed for 2025/26 – and why it matters
Three levers moved this year:
- Employee NIC: 8% main rate to the upper earnings limit, then 2% above (HMRC, 2025/26).
- Employer NIC: 15% on earnings above the £5,000 secondary threshold; Class 1A and 1B are also 15% (HMRC, 2025/26).
- Employment Allowance: £10,500 if eligible; not available where a company’s only employee is a director (HMRC, eligibility).
Add two constants that still drive owner-manager tax planning: corporation tax is 19% for small profits, 25% for profits over £250,000 with marginal relief in between (HMRC), and the dividend allowance is £500 with dividend tax rates unchanged (HMRC/Annex A).
Owner-manager tax planning in practice: Key principles
- Salary still reduces corporation tax: A salary and the associated employer NIC are deductible. At a 25% corporation tax rate, every £1,000 of deductible pay and NIC typically saves £250 in corporation tax.
- Dividends don’t reduce corporation tax: Dividends are paid from post-tax profits, then taxed again personally at dividend rates.
- Employment Allowance can swing the answer: If you can use the £10,500 allowance, you may pay little or no employer NIC on a typical director’s salary, strengthening the case for a salary up to the personal allowance. If you cannot claim it (single-director payroll), the 15% employer NIC is a real cost. (HMRC, 2025/26).
- Personal bands are frozen: The personal allowance (£12,570) and higher-rate threshold (£50,270) are unchanged. With inflation at 3.8% (ONS, 2025), fiscal drag pulls more income into higher rates, which can also pull dividends into higher bands.
Worked examples: Salary vs dividend at three profit levels
Assumptions: One UK company, single shareholder-director, England rates; no other income; ignores student loan/child benefit taper; dividend allowance £500; dividend rates 8.75%/33.75%/39.35%; corporation tax 19% (small profits) for the £60k example and 25% (main rate) for the £150k and £350k examples. We show two variants – with Employment Allowance (EA) available and without (single-director payroll). Calculations are rounded, indicative and for 2025/26 rules from HMRC.
Profit before extraction: £60,000 (likely in the 19% CT band)
- Strategy A – Low salary, rest dividends (EA available):
Salary: £12,570. Employee NIC: £0. Employer NIC: mostly covered by EA.
CT saving: salary fully deductible, so taxable profits drop to ~£47,430; CT ~£9,012.
Post-tax profit for dividends: ~£50,988 − £12,570 salary − CT ~£9,012 ≈ £39,406; dividend tax at 8.75% after £500 allowance ≈ £3,390.
Cash to owner: salary £12,570 + dividends ~£36,016 ≈ £48,586.
- Strategy B – Low salary, rest dividends (no EA):
Employer NIC at 15% on £12,570 above £5,000 ≈ £1,135. Salary cost £13,705. Taxable profits drop to ~£46,295; CT ~£8,796. Post-tax profit ≈ £60,000 − £13,705 − £8,796 ≈ £37,499; dividend tax ≈ £3,237.
Cash to owner: ~£12,570 + £34,262 ≈ £46,832.
- Strategy C – Higher bonus instead of dividends (no EA):
Paying a bonus increases employer NIC at 15% and triggers 8% employee NIC and 20% income tax. Even after 19% CT relief, the combined NIC and tax typically leaves less in hand than A/B at this profit level.
Indicative takeaway: With EA, a modest salary plus dividends usually wins. Without EA, dividends still tend to beat a large salary at this level.
Profit before extraction: £150,000 (25% CT)
- Strategy A – Low salary (£12,570) + dividends (EA available):
Employer NIC covered by EA. CT on remaining profit ~£34,358. Dividends (after CT) are taxed partly at 8.75% then 33.75% as you move past higher-rate band.
Net to owner: typically £108k–£111k after personal taxes.
- Strategy B – Low salary + dividends (no EA):
Add ~£1,135 employer NIC cost; slightly higher CT saving but still less efficient than A.
Net to owner: typically £106k–£109k.
- Strategy C – Large bonus in place of most dividends (no EA):
For amounts above the personal allowance, add 20% income tax and 8% employee NIC, plus 15% employer NIC (with 25% CT relief). On large extractions, dividends taxed at 33.75% often compare favourably to the full NIC stack on salary.
Net to owner: often a little lower than A/B unless EA shields most employer NIC.
Profit before extraction: £350,000 (25% CT, most dividends in higher/additional rates)
- Strategy A – Low salary + dividends (EA available):
You’ll move into the additional-rate band for dividends at 39.35%. Even so, avoiding employer NIC keeps this competitive.
Net to owner: commonly £230k–£236k after taxes.
- Strategy B – Low salary + dividends (no EA):
The 15% employer NIC on any salary above £5,000 matters at this scale; dividends typically remain preferable for most of the extraction once the personal allowance is used.
Net to owner: typically £226k–£232k.
- Strategy C – High bonus blend:
A partial bonus can still be sensible to use remaining basic-rate band (for income tax at 20% and 8% employee NIC) if EA covers employer NIC. Without EA, pure dividends generally outperform for most of the extraction above the allowance.
Practical steps we recommend
- Set a baseline salary:
Personal allowance salary: For many owners, a salary around £12,570 keeps income tax and employee NIC down, protects state pension credits, and is deductible for corporation tax. Where EA applies, employer NIC may be nil; where it doesn’t, budget for the 15% charge above £5,000 (HMRC, 2025/26). - Use dividends for the rest:
Dividend timing: Consider monthly or quarterly dividends to match cashflow; keep minutes and interim accounts to evidence distributable profits. Dividend tax applies above the £500 allowance. - Check Employment Allowance eligibility early:
If you employ staff, the £10,500 allowance can materially change your mix. One-person companies with a sole employee who is a director cannot claim it. - Pension contributions:
Company pension contributions: Deductible for corporation tax and no NIC, often beating either salary or dividend at higher profit levels. Get advice on annual allowance and carry forward. - Watch the macro backdrop:
With CPI at 3.8% (ONS, 2025) and a higher employer NIC take forecast to raise receipts, build headroom into cashflow and dividend plans.
How we can help this year
Owner-manager tax planning is about the numbers in your business – profit level, associated companies, payroll profile, and cash needs. For 2025/26, a low salary and dividends will suit many owners, especially where Employment Allowance removes employer NIC. Where EA is unavailable, the 15% employer NIC steers you away from large salaries, though targeted bonuses, pensions, and benefits can still be efficient. We’ll model your exact mix, consider pension planning, and ensure compliance with HMRC paperwork.
If you’d like us to produce a personalised owner-manager tax planning report for 2025/26 – including salary/dividend scenarios, pensions, and cashflow impact – contact our team today.