April 18, 2025
By Merranti

Optimal Profit Extraction for 2025/26: Salary, Dividends & Smart Planning

Introduction: A New Tax Year, A New Opportunity

The 2025/26 tax year began on 6 April 2025, offering a fresh opportunity for director-shareholders to plan how they extract profits from their company in the most tax-efficient way.

Whether you run a personal or family-owned limited company, it’s essential to review:

What your income needs are this year
Any changes in tax thresholds and allowances
Whether your previous profit extraction strategy still works

In this guide, we explore the optimal strategy for extracting profits in 2025/26, including salary, dividends, pension contributions, and benefits-in-kind.

Why Profit Extraction Planning Matters

Your limited company is a separate legal entity, meaning profits belong to the company unless extracted.

Getting your strategy right means:

Paying less income tax and NICs
Maximising use of allowances
Reducing overall tax burdens for you and the business
Building toward your state pension or retirement

Step 1: Pay a Tax-Efficient Salary – Why £12,570 Is the Magic Number

A small salary, complemented by dividends, remains the most popular route.

Why pay a salary at all?

Qualifies for state pension: To earn a full UK state pension, you need 35 qualifying years of NICs. If you haven’t reached this yet, paying a salary helps.
Attracts corporation tax relief: Your company can deduct the salary (and employer NICs) as a business expense.

Optimal salary for 2025/26: £12,570

This salary level:

Fully uses your personal allowance
Avoids employee NICs (primary threshold = £12,570)
May trigger employer NICs (see below), but the corporation tax relief offsets this

Employer NICs: Is It Worth Paying?

In a single-director company:

The employment allowance is not available
Employer NICs at 15% are due on salary above the secondary threshold (£5,000)
At £12,570, the employer NIC bill is £1,135.50

However:

This cost is fully deductible for corporation tax
At a 25% corporation tax rate, the tax saving outweighs the NIC cost

Conclusion: Even if you have to pay employer NICs, it’s still efficient to pay a salary of £12,570.

In a family company (with more employees):

You may qualify for the £10,500 employment allowance
This allows salary of £12,570 free of employer and employee NICs

Practical Tip: If you’ve already hit 35 qualifying years for the state pension, you may choose a lower salary (e.g. £9,100) to avoid employer NICs altogether.

Step 2: Extract Further Profits as Dividends

Once the salary is paid, it’s more tax-efficient to pay dividends than to increase salary or pay bonuses.

Dividend tax rates 2025/26:

0% on the first £500 (dividend allowance)
8.75% within the basic rate band
33.75% within the higher rate band
39.35% for additional rate

Remember:

Dividends are paid from post-tax profits
Dividends attract no NICs
Dividends are paid in proportion to shareholdings, unless you use alphabet shares to customise payments

Tip: Use family shareholders’ allowances and tax bands (e.g. spouse) to extract dividends more tax-efficiently.

Is It Worth Paying Dividends Above the Allowance?

That depends on your cash needs.

If you need the money personally:

Pay further dividends and accept some personal tax, which will still be lower than income tax + NICs.

If you don’t need the money:

Leave profits in the company and delay extraction until a more favourable time (e.g. retirement or sale using Business Asset Disposal Relief).

Step 3: Consider Employer Pension Contributions

Company-paid pension contributions are one of the most tax-efficient ways to extract profits.

Advantages:

No NICs or income tax for the director
Fully deductible for corporation tax
Tax-free growth inside the pension
Contributions up to £60,000/year (or more using carry-forward)

Contributions must pass the “wholly and exclusively” test – i.e. they must be justifiable in terms of business remuneration.

Step 4: Use Tax-Free Benefits and Perks

Some benefits-in-kind can be provided tax-free:

Benefit	Tax Treatment
Mobile phone (1 per director)	Tax-free if provided by company
Employer pension contributions	Tax-free for the employee
Trivial benefits (£50 max)	Exempt under trivial benefit rules
Annual party (up to £150/head)	Exempt if rules are followed

Trivial benefits can total up to £300 per year per director (if structured correctly).

Summary Table: 2025/26 Profit Extraction Strategy

Extraction Method	Tax/NICs Cost	Corporation Tax Relief?	Comments
Salary (£12,570)	£0 tax / Employer NICs of £1,135.50	Yes	Still efficient overall
Dividends (first £500)	0%	No	Tax-free income allowance
Dividends (basic rate)	8.75%	No	Still cheaper than salary
Employer pension contribution	0%	Yes	Long-term tax-efficient planning
Mobile phone (company)	0%	Yes	Benefit must meet exemption rules
Trivial benefits	0%	Yes	Must stay under £50 per item

Bonus Tip: Retain Profits for Business Growth

If you don’t need the cash personally, consider retaining profits in the company:

To reinvest in growth
To accumulate for future tax-efficient extraction (e.g. via pension or capital gains)
To take advantage of Business Asset Disposal Relief (10% CGT) on a future company sale

Final Thought: Get 2025/26 Right From the Start

The best time to plan profit extraction is now, at the start of the tax year — not at the end.

A tailored approach based on your:

Pension status
Family circumstances
Business needs
Future plans

…will ensure that you’re extracting profits in the most efficient way possible.

Need Help Optimising Your 2025/26 Profit Extraction?

At Merranti Accounting, we specialise in helping:

Director-shareholders
Family-run businesses
Contractors and consultants

…extract profits tax-efficiently, keep more of what they earn, and plan for long-term financial success.