Hi

The new tax year started on 6 April 2025. That resets the clock on allowances and rates. So, this is the perfect time to step back, look at how you pay yourself, and see if last year’s strategy still stacks up. If your circumstances have changed—or if you simply want to make sure you’re not paying unnecessary tax or National Insurance—read on.

I’m going to walk you through how to extract profits from your limited company as tax-efficiently as possible in 2025/26. I’ll also flag up a few overlooked options that could save you money or boost your future income.

Start by Understanding the Basics

Your company is a separate legal entity. If you want to use its profits personally, you have to take them out. There are several ways to do this—some more painful than others in tax terms.

The most popular method for small companies is a combination:

• A modest salary
• Dividends on top

This mix usually keeps tax and National Insurance to a minimum. But every year, thresholds and allowances change, and the numbers don’t always stay the same. What worked last year might now cost you more.

The Optimal Salary for 2025/26

If you’re a director-shareholder and haven’t yet built up 35 qualifying years for the full state pension, paying yourself at least the annual lower earnings limit makes sense. For 2025/26, that figure is £6,500.

Why? Because this ensures you get a qualifying year for state pension purposes without actually paying employees’ National Insurance. Between the lower earnings limit (£6,500) and the primary threshold (£12,570), you’re treated as having paid NICs even though you haven’t paid a penny.

But here’s the catch:

• The secondary NICs threshold for employers is only £5,000 this year—less than the lower earnings limit.
• So your company will have to pay employer’s NICs on the slice above £5,000.

If you don’t qualify for the employment allowance (which you won’t if you’re the only employee/director), then your company will pay employer’s NICs at 15%.

Illustration:

• If you pay yourself £6,500, employer’s NICs are £225.
• If you pay yourself £12,570 (the maximum you can get without employees’ NICs), employer’s NICs are £1,135.50.

In contrast, if you run a family company with more employees, you might be able to use the employment allowance (£10,500 this year) to offset that cost. In that case, you could pay £12,570 without employer’s or employee’s NICs, assuming you haven’t used the allowance elsewhere.

Should You Pay the Higher Salary Even If You Must Pay Employer’s NICs?

You might think, “Why bother paying £1,135 in employer’s NICs?” Here’s why it can still make sense:

Both salary and employer’s NICs are deductible expenses for corporation tax. With corporation tax rates now ranging between 19% and 25%, the tax saving on the salary plus NICs often outweighs the extra NICs cost.

That’s why for most small companies, £12,570 remains the optimal salary in 2025/26—even though some employer’s NICs are due.

However, once you go above £12,570, things get less attractive:

• You start paying income tax at 20%.
• Employee’s NICs kick in at 8%.
• The combined tax and NICs cost is higher than the corporation tax relief.

So if you need more money beyond that salary, you’re usually better off using dividends.

Dividends and the 2025/26 Dividend Allowance

Once you’ve paid yourself that optimal salary, the next step is to extract further profits as dividends.

Dividends are appealing because:

• They’ve already been subject to corporation tax.
• No National Insurance applies.
• Dividend tax rates are lower than normal income tax rates.

For 2025/26, every individual gets a dividend allowance of £500. Dividends within this allowance are tax-free, but they still use up part of your basic rate band.

Any dividends above the £500 allowance are taxed at:

• 8.75% in the basic rate band
• 33.75% in the higher rate band
• 39.35% in the additional rate band

You also need to make sure your company has enough retained profits to lawfully declare dividends.

In family companies, you can often use different share classes (“alphabet shares”) to tailor dividends to each shareholder. If you don’t have an alphabet share structure, you must pay dividends in proportion to shareholdings.

If you don’t need the cash personally, it can be cheaper to leave profits in the company to defer the personal tax. But if you do need the money, dividends are still generally more tax-efficient than paying yourself extra salary or a bonus.

Other Ways to Extract Profits Tax-Efficiently

Don’t overlook these additional options, which are often underused:

Pension contributions
Your company can contribute to your pension (within your annual allowance). These contributions are:

• Corporation tax deductible
• Free of income tax and NICs for you personally

This is an excellent way to build up retirement funds if you don’t need all the cash now.

Tax-free benefits and allowances
Certain benefits-in-kind remain exempt from tax and NICs:

• A mobile phone contract in the company’s name
• Employer pension advice up to £500 per year
• Trivial benefits

Trivial Benefits—up to £300 per year per director
If you’re a director of a close company, you can receive up to £300 worth of small gifts per year tax-free, as long as:

• Each gift costs no more than £50
• It’s not cash or a cash voucher (store vouchers are fine)
• It isn’t a reward for work or performance

A close company is, in simple terms, one that’s controlled by five or fewer shareholders or any number of directors.

Example:

• You are the sole director of your limited company.
• You can give yourself up to 6 x £50 store gift vouchers in the tax year (because 6 × £50 = £300).
• As long as you don’t exceed £300 in total, and none of the vouchers are cash or exchangeable for cash, they’re exempt from tax and NICs.
• These vouchers must not be a reward for services or performance. Think birthday gifts, seasonal treats, or a thank-you gesture.
• You do not need to report trivial benefits on a P11D.
• You can also give the same trivial benefits to family members who are employees or directors, each with their own £300 cap.

Annual events allowance—£150 per person
Your company can also pay for annual events such as a Christmas meal or summer gathering. The cost is tax-deductible and won’t create a benefit in kind if:

• The event is open to all employees (in small companies, this can mean all directors)
• It costs no more than £150 per person (including VAT, food, drink, transport, and accommodation)

This is a legitimate way to enjoy some company-funded hospitality without triggering tax charges.

For most directors who don’t yet have their 35 qualifying years for the state pension, the sweet spot in 2025/26 is:

• Salary: £12,570
• Dividends: As needed to cover your personal income requirements
• Trivial Benefits: Up to £300 in small gifts or vouchers
• Annual Event: £150 per person for an annual gathering

This approach gets you:

• A qualifying year for your state pension
• No employee NICs
• The personal allowance fully used
• Dividends taxed more lightly than extra salary
• Some enjoyable perks tax-free

Is there a better way?

Possibly. Your circumstances are unique. You might have other income, other shareholders, or plans to sell the company. Or you may want to use pension contributions more heavily.

If you’re not sure, or you’d like to model the exact figures for your situation, let’s set up a planning session. Feel free to send over any questions or the details of your setup—happy to explore this with you in detail.

Noel Guilford