The optimal salary/dividend split
For a single-director Ltd with no other income, the standard approach in 2025/26:
- Salary up to £12,570 (the personal allowance). Earns state pension credits, qualifies for various reliefs, and is deductible from CT.
- Dividends to fill the basic rate band (up to £50,270 total income). Taxed at 8.75% personal, plus already-paid CT in the company.
- Dividends in the higher band only if you need the cash. 33.75% personal tax on these is significant - retaining in the company or paying into a pension is usually more tax-efficient.
Director SIPP - the most tax-efficient extraction
Pension contributions paid by the company directly into a director SIPP are one of the most tax-efficient ways to extract value:
- The company gets a Corporation Tax deduction for the contribution (up to £60K/year per director, plus carry-forward of unused allowance).
- No employer NI on pension contributions (vs salary).
- No income tax for the director when paid (only when drawn in retirement).
- £60K annual allowance for most directors; tapered for very high earners.
For directors who can afford to leave money in the company, maxing the pension contribution before paying higher-rate dividends is almost always the right call.
Directors' loans - the Section 455 trap
If you take money out of the company that isn't salary or dividend, it's a director's loan. The traps:
- Above £10,000: triggers a benefit-in-kind charge unless the company charges you HMRC's official rate of interest (currently around 2-3%).
- Not repaid within 9 months of year-end: the company pays Section 455 tax of 33.75% of the unpaid balance. This is reclaimable when the loan is repaid, but it's a meaningful cash drag.
- Bed and breakfasting: repaying and re-borrowing within 30 days is anti-avoidance treated as the original loan. HMRC will catch this.
Frequently asked questions
Should I take the maximum salary or just the personal allowance?+
For most single-director Ltds, the personal allowance amount (£12,570) is optimal. Going higher into the basic rate band triggers employee NI and isn't more tax-efficient than dividends. The exception: if you're maxing your pension contribution and want to count higher salary as relevant earnings.
Can the company pay my partner's pension?+
Only if your partner is a genuine employee or shareholder of the company doing real work. A non-working spouse can't have employer pension contributions made on their behalf - HMRC will challenge it as a settlement.
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