After the Spring Budget for 2025, many directors have asked a simple question with tricky implications: should I keep drawing funds from my limited company as dividends, or shift more into salary and pensions Instead of a single rule, the right blend depends on your income bands, your company profits, and cash flow priorities. Dividends can still be efficient for many owner managers in 2025 to 2026, but the margin for error is smaller and planning matters more than ever.
What changed for dividends in 2025 to 2026
Two levers shape the picture for this year. First, the dividend allowance remains £500. Second, the band rates for dividends are unchanged for 2025 to 2026: 8.75 percent for basic rate, 33.75 percent for higher rate, and 39.35 percent for additional rate. Allowances stack with your personal allowance when available, so you can usually receive around £13,070 tax free if your personal allowance is fully available and your other income is low enough to preserve it 123.
In the background, corporation tax continues at 25 percent for main rate companies from April 2025, so any dividends you take are paid from post tax profits. Dividends are not deductible for corporation tax, and they do not attract employee or employer National Insurance, which is why they often feature in a tax efficient mix 4.
Rates and allowances at a glance
Here is a brief snapshot to anchor your planning. If your total income stays within the basic rate band, the 8.75 percent dividend rate can still be attractive. Cross into higher rate and the 33.75 percent rate begins to erode the headline advantage, especially once you factor corporation tax already paid by the company.
The following bullets pull together the essentials.
- Dividend allowance: £500 at zero percent, then banded rates apply 13.
- Dividend rates 2025 to 2026: 8.75 percent basic band, 33.75 percent higher band, 39.35 percent additional band 23.
- Personal allowance interaction: Your £12,570 can cover part of salary or dividends, but it tapers above £100,000 of total income 3.
- Corporation tax: Paid before dividends, main rate 25 percent for financial year starting April 2025 4.
Are dividends still worth it for directors
For many owner managers, yes, within the basic rate band. Dividends avoid NICs and keep payroll straightforward. Once you edge into the higher band, the advantage begins to soften, especially if you ignore other planning tools like employer pension contributions.
Two practical points often get missed. First, a small salary at around the primary thresholdA salary at or above the National Insurance primary threshold maintains access to state pension credits while keeping NICs low or nil, depending on the exact threshold and year. keeps your state pension record intact and protects certain benefits. Second, dividends can trigger payments on account and student loan deductions if your total income climbs, so cash planning matters as much as rate chasing.
Choosing your mix: salary, dividends, pensions
There is rarely a one size fits all answer. The most efficient route for a director in the basic band will not look the same for someone near the additional rate, or for a company reinvesting profits. The table below shows a quick directional guide.
| Option | Personal tax | NI impact | Best used for |
|---|---|---|---|
| Salary | PAYE rates by band | Employee and employer NI possible | Qualifying years, consistent income, mortgage evidence |
| Dividends | 8.75 percent, 33.75 percent, 39.35 percent | No NI | Extracting profit after CT, flexible timing within a year |
| Employer pension | Usually no personal tax on contribution | No NI on employer contribution | Long term extraction, reduces CT if deductible |
Salary
PAYE rates by band
Employee and employer NI possible
Qualifying years, consistent income, mortgage evidence
Dividends
8.75 percent, 33.75 percent, 39.35 percent
No NI
Extracting profit after CT, flexible timing within a year
Employer pension
Usually no personal tax on contribution
No NI on employer contribution
Long term extraction, reduces CT if deductible
| Criteria | Dividends | Salary |
|---|---|---|
| NI cost |
✓
|
✕
|
| Corporation tax deductible | No | Yes |
| Personal allowance preservation | Possible at low income levels | Possible with small salary planning |
| Mortgage evidence | Variable | Stronger |
| Future rate risk | Rates scheduled to rise from 2026 | Stable |
A simple planning sequence you can follow
Use the steps below to pressure test your approach for this year. A few small changes usually save more than they cost to implement.
Map your income bands
Project salary, dividends, savings, and benefits. Anchor totals against the basic, higher, and additional income bands to see where each extra £1 will be taxed 3.
Lock in a small salary
Set salary to secure state pension credits and keep employer NI low. This gives lenders a payslip trail while leaving headroom for dividends.
Use dividends up to your cheapest band
Fill the basic rate band with dividends where possible. Recheck totals if you also take rental or savings income, as these change the order in which thresholds are crossed 3.
Consider employer pension contributions
If cash permits, company contributions can reduce corporation tax and bypass personal tax today. Keep an eye on annual allowance rules and carry forward.
Time distributions
If you are close to a higher band this year, bringing a dividend into an earlier year, or delaying until the next year, can smooth the effective rate. Watch the scheduled rate rise from April 2026 5.
Where Pennine Accounting can help
We work with directors across Rochdale, Oldham, Littleborough, and West Yorkshire to design a simple, repeatable extraction plan that fits your targets. That often means a modest salary, dividends scheduled through the year, and, where cash allows, thoughtful employer pension contributions. We also integrate Xero for real time insights so you always know your headroom before pressing the button on the next distribution.
If you want a quick review, bring last year’s accounts, current year to date figures, and any big changes you see coming. We will map your bands, model options, and leave you with a clear action list before the next payroll run.
Bringing it all together
Dividends remain effective for many directors in 2025 to 2026, especially inside the basic rate band, but the small £500 allowance and a 25 percent corporation tax backdrop mean you should plan the whole picture: salary, dividends, and pensions.
If in doubt, model the numbers before you vote a dividend, then adjust the timing through the year to keep within your most efficient bands.