Salary vs Dividends: Your Director Remuneration Strategy for 2025-26

As we enter the new tax year, company directors across Kent are reassessing their remuneration strategies. The fundamental question persists: should you extract profits through PAYE salary, dividends, or a strategic combination of both? With significant tax changes now in effect, 2025-26 presents an ideal opportunity to optimise your approach.

Key Tax Changes Affecting Directors

Several important changes are reshaping director remuneration decisions this year. Owner-managed business shareholders now face new dividend disclosure requirements, mandating the use of employment pages (SA102) on self-assessment returns to report dividend income and shareholding percentages from their own companies.

Self-employed individuals must now declare commencement or cessation dates for any self-employment activities from April 2025. This enhanced reporting provides HMRC with additional data to scrutinise employment status, making professional advice increasingly valuable for compliance and strategic planning.

National Insurance Changes Impact Employer Costs

The most substantial changes involve employers' National Insurance contributions. The threshold has dropped from £9,100 to £5,000, whilst rates have increased to 15%. This means employers pay Class 1 NI at higher rates and commence payments earlier than previously.

However, the employment allowance has doubled from £5,000 to £10,500, with eligibility restrictions for smaller employers removed. Crucially, claiming this allowance requires at least two directors or employees earning over £5,000. Single directors without additional employees cannot access this relief. For businesses with multiple connected companies, the allowance applies to only one payroll.

Comparing the Financial Impact

Understanding the numerical differences between salary and dividend strategies remains essential for informed decision-making. Salaries provide predictability, pension contributions, and corporation tax relief, whilst dividends offer lower tax rates without National Insurance obligations.

The dividend allowance remains £500 for 2025-26, with payments requiring available profits. Consider a limited company with £150,000 profit before owner remuneration, assuming no other employees and standard tax codes:

Our analysis demonstrates that dividend extraction typically provides higher take-home pay (£79,961 vs £68,558), though total tax liability may be marginally higher (£53,542 vs £52,485). The salary approach retains significantly more profit within the business (£28,958 vs £16,496), potentially valuable for future investment or expansion.

Choosing Your Optimal Strategy

The most effective approach depends on your personal circumstances and business objectives. Both strategies qualify for state pension entitlement and mortgage applications, though salary payments may slightly simplify lending processes due to their predictable nature.

Dividends suit directors seeking to maximise take-home income, provided sufficient profits exist and irregular income patterns are acceptable. Many successful directors adopt hybrid approaches, balancing regular salary income with dividend top-ups to optimise both cash flow and tax efficiency.

Strategic Planning Recommendations

With enhanced National Insurance costs and reporting requirements, proactive planning becomes crucial. We recommend forecasting annual company profits, calculating optimal salary levels based on NI thresholds, developing dividend strategies that balance personal income needs with business investment requirements, and reviewing your approach quarterly as financial performance crystallises.

Remember that dividend payments without sufficient profits may create director's loan accounts, requiring repayment or additional tax charges.

Professional Guidance for Kent Businesses

Every director's situation is unique, requiring tailored strategies that consider individual circumstances, business goals, and financial health. At MCC Partners, we understand the challenges facing Gravesend's business community and provide practical, jargon-free advice to optimise your remuneration strategy.

Our team combines technical expertise with real-world business experience to deliver comprehensive guidance on director remuneration, ensuring compliance whilst maximising your financial position.

Ready to optimise your director remuneration strategy? Contact MCC Partners at This email address is being protected from spambots. You need JavaScript enabled to view it. or call 01474 619 990 for expert guidance tailored to your business needs.