Paying yourself from your business
Paying yourself from your business sounds straightforward, but once you start weighing up salary, dividends and pensions, it quickly becomes more nuanced. The “right” mix depends on profits, cashflow and your wider personal circumstances – such as child benefit, student loans or whether you’re close to a higher tax band.
This guide explains the main options for the 2025/26 tax year, highlights the key thresholds that tend to shape decisions and shows how each route fits into a sensible overall plan. Think of it as a reference point you can return to as the year progresses.
The Key Numbers That Influence Decisions in 2025/26
Most income planning revolves around a handful of figures:
- Personal allowance: £12,570
- Basic rate band: 20% on up to £50,270
- Higher rate: 40% on £50,271 to £125,140
- Additional rate: 45% on over £125,140
Once income exceeds £100,000, the personal allowance is reduced, disappearing completely at £125,140. These thresholds are often where planning makes the biggest difference.
Salary: Reliable, But With National Insurance to Consider
A salary provides predictable income and uses your personal allowance in a straightforward way. It also creates “earned income”, which can be important for pension contributions and certain reliefs.
However, National Insurance (NI) is the key factor. In 2025/26:
- Employee NI starts above £12,570
- Employer NI starts above £5,000, charged at 15%
This means that paying a salary close to the personal allowance can trigger employer NI unless the business qualifies for employment allowance, which can offset up to £10,500 of employer NI each year. Not all companies qualify, so this needs checking carefully.
For directors, NI is calculated on an annual basis, meaning timing can affect deductions. This is one area where modelling beats rules of thumb.
Dividends: Flexible, But Not Always the Cheapest Option
Dividends don’t attract NI, which is why they’re popular with company owners. In 2025/26:
- Dividend allowance: £500
- Dividend tax rates:
- 8.75% (basic rate)
- 33.75% (higher rate)
- 39.35% (additional rate)
Dividends can only be paid from distributable profits, and unlike salary, they don’t reduce corporation tax. This means the true cost of dividends includes corporation tax first, then personal dividend tax. Once you factor that in, dividends are not always cheaper than salary.
Dividends also count towards your total income, which can affect things like child benefit and student loan repayments.
Pensions: Tax-Efficient and Often Overlooked
For many owner-managers, pensions are the most tax-efficient way to pay themselves – just later rather than now.
Employer pension contributions are often particularly attractive because they:
- Reduce corporation tax
- Avoid income tax and NI
- Aren’t limited by your salary level
The annual pension allowance for 2025/26 is £60,000, although high earners may face tapering. If most of your income comes from dividends, employer contributions can be especially useful, as personal contributions are usually limited to earned income.
Pensions aren’t just for large companies – they remain a mainstream, tax-advantaged way to build long-term wealth.
Household Factors That Can Change the Answer
Some personal factors can quickly shift the “best” mix:
- Child benefit: the High-Income Child Benefit Charge starts once adjusted net income exceeds £60,000 and fully claws back benefit by £80,000. Dividends are included in this calculation.
- Student loans: repayments are based on total income reported through self-assessment, not just what’s deducted through payroll.
Ignoring these can lead to unexpected costs.
A Practical Checklist Before 5 April 2026
Before the end of the tax year, it’s worth:
- Forecasting your total income for the year
- Checking which thresholds you’re close to
- Confirming whether employment allowance applies
- Reviewing distributable reserves before paying dividends
- Considering whether pension contributions could reduce tax
- Factoring in child benefit and student loan impacts
A short review now can prevent surprises later and ensure you’re paying yourself in a way that supports both your lifestyle and your business.
If you’d like help sense-checking your approach or comparing options, a simple scenario review using your year-to-date figures can bring clarity and confidence to your decisions. For advice on this, or any aspect of your business finances, our experienced team at Dunkley’s Accountants are here to help. Call us on 01454 619900 or email us to book in a meeting at advice@dunkleys.accountants.