Company director tax guide 2025/26: PAYE, dividends, and more

As a company director in the 2025/26 tax year, you must understand what taxes you need to pay and how you can pay yourself efficiently. For 2025/26, you will pay Income Tax and National Insurance Contributions on your income, plus Dividend Tax, if you take income as dividends. This guide explains the current rates, thresholds, and steps you should follow (such as registering for PAYE and Self Assessment) to stay compliant and minimise your tax bill.

These points are explained in detail below, along with practical tips for paying yourself tax efficiently.

How much tax does a limited company director pay?

As a director of your limited company, and assuming you are also an employee, you pay Income Tax and NIC on your income. The personal allowance is £12,570 for 2025/26, so you pay no Income Tax on your earnings up to £12,570. Income above that is taxed at various rates. The basic Income Tax rates in England, Wales, and Northern Ireland are:

• £0 to 12,570: 0% (personal allowance).
• £12,571 to £50,270: 20% (basic rate).
• £50,271 to £125,140: 40% (higher rate).
• Over £125,140: 45% (additional rate).

Also, if you earn over £100,000, your personal allowance is gradually withdrawn by £1 for each £2 above £100,000, reaching zero at £125,140.

NIC for directors

In addition to Income Tax, you pay Class 1 National Insurance on your salary. The thresholds for 2025/26 are: a primary threshold of £12,570 per year (0% NIC below this) and an upper earnings limit of £50,270. The employee NIC rates (category A) are:

• 0% on earnings up to £12,570 per year.
• 8% on earnings from £12,571 up to £50,270.
• 2% on any earnings over £50,270.

These NICs are deducted from your salary through PAYE. (The company also pays employer NIC at about 13.8% on salaries above £5,000 each year.)

Dividends and tax – what company directors need to know

When your business generates profits, you, as a shareholder, receive dividends that are taxed in different ways. The dividends are generated after your business has paid the corporation tax, and you don’t pay any NIC on them.

The extent of your allowance in 2025/26 is small, but you get £500 of dividends per year tax-free. Anything above that is taxed depending on your income tax band.

Here’s what you need to know:

Dividend tax rates explained

• Dividend Allowance: £500 tax-free per year.
• Basic-rate band: 8.75% on dividends (if your total income is up to £50,270).
• Higher-rate band: 33.75% on dividends (if total income is £50,271–£125,140).
• Additional-rate band: 39.35% on dividends (above £125,140).

(Importantly, dividends first use up any unused Personal Allowance, then the dividend allowance, then fall into the income bands above.)

Are dividends or salary more tax-efficient?

Overall, dividends are more tax-efficient than income/salary with regard to take-home pay, as they are taxed at lower rates and do not involve any contribution to employee NICs. A common approach is to pay yourself a salary up to the Personal Allowance (and NIC threshold), then take additional income as dividends to minimise tax and avoid employer/employee NIC.

For example, if you draw a salary of £12,570, you won’t pay any Income Tax or National Insurance. Dividends above this would then be taxed starting at 8.75%, depending on your total income bracket.

Below is a quick comparison of key points:

	Salary (wages)	Dividends (profit distribution)
Tax-free allowance	£12,570 Personal Allowance	£500 Dividend Allowance
Income Tax rates	20%, 40%, 45% (above £12,570)	8.75%, 33.75%, 39.35% (above £500)
National Insurance (employee)	8% on £12,571–£50,270; 2% above	None
Employer NIC	~13.8% above £5,000	None
Effect on company tax	Salary is an allowable expense (reducing profits)	Company pays Corporation Tax on profits first

In practice, balancing a small salary (to secure your allowances and NIC credits) with dividends often yields the most take-home pay. See the worked example at the end of the guide for a comparison.

When and how to register for PAYE

You must register your company as an employer with HMRC before making your first salary payment or issuing payslips. This registration allows you to operate PAYE and meet reporting obligations. You can register up to two months in advance of your first payday, giving you time to prepare payroll in line with reporting rules. Even if you are the only employee, setting up a PAYE scheme is mandatory when paying a salary.

• Self Assessment guidance for company directors and shareholders
• How to pay yourself through a limited company
• 15 reasons you need an accountant for a limited company

Once registered, you should use payroll software to calculate tax and NIC on each pay period and submit payroll reports to HMRC on time. Many directors choose to hire an accountant or use online software to simplify PAYE.

Do you need to file a Self Assessment tax return?

Yes, in many cases. If all your income has been taxed under PAYE (one job/salary and no other income), you might not need to file. But most directors will have dividends or other income to report. Register for Self Assessment by the 5th of October, following the end of the tax year, if you must file a return.

When directors must register

If you receive dividends or any other income not taxed at source, and your total earnings exceed tax-free allowances, you must report it through Self Assessment.

You must also register any other sources of untaxed income. This may include rental income, interest, freelance income, as well as benefits in kind – all of these trigger Self Assessment.

Having income from more than one employer or company may require you to file a return to square up taxes.

What income you must report

On your Self Assessment return, you must report all taxable income – including your full salary (even if taxed via PAYE), dividend payments, and any other income such as rental profits or self-employment.

You’ll also declare any allowable expenses or pension contributions. After calculating totals, you pay any Income Tax and NIC due by the deadlines (31st of January for the previous tax year’s return).

Choosing between salary and dividends – worked example

Let’s compare two simple scenarios to see how take-home pay differs:

Example 1: Low salary, high dividends

A director takes a £12,570 salary (no tax or NIC due) and £20,000 in dividends (total income £32,570).

Here is a breakdown of how your take-home pay would look:

• Salary uses the full personal allowance, so £0 tax/NIC on wages.
• The first £500 of dividends is tax-free, leaving £19,500 taxed at 8.75% (basic rate) = £1,706 tax.
• No NIC on dividends.

In this example, your net income would be £30,864.

Example 2: Higher salary, lower dividends

A director takes a £20,000 salary and £10,000 dividends (total £30,000).

Here is a breakdown of how your take-home pay would look:

• Your first £12,570 is covered by the tax-free salary allowance, so £7,430 taxed at 20% = £1,486.
• Employee NIC: 8% on £7,430 = £594.
• Dividends: £500 tax-free, £9,500 taxed at 8.75% = £831.

Therefore, your net income would be £27,089.

In these two cases, Example 1 (with more dividends) yields approximately £3,775 more net pay than Example 2. This comparison shows how combining a minimal salary with dividends can significantly boost your take-home income – while remaining tax compliant.

Note: the company will have paid corporation tax on profits, but the above focuses on personal tax for clarity.

Next steps for company directors

Navigating tax as a company director can be complex, especially when optimising income and staying compliant. Thankfully, our Full Company Secretary Service ensures your filings and records are accurate and up to date, so you can focus on running your business with confidence. Shape