Company directors – you need to read this!

There are many changes to the tax regime that take effect from 6th April 2025 that could impact how you choose to pay your salary during the 2025-2026 tax year and beyond. The increase in employer’s National Insurance Contributions (NICS) for example, may mean that you choose to take a lower salary and increase your dividend or pension payments.  We have outlined the optimum salary for directors below if you wish to minimise your tax liability.

The most tax efficient director’s salary for 2025-2026

Changes to Employer’s National Insurance Contributions (NICs) are likely to have a big impact on wage bills as well on Director’s salaries. Salaries are a tax deductible expenditure for limited companies, dividends aren’t but the new employer NICs levels means that the optimum balance between paying a salary and a dividend may have shifted – depending on how many directors are in your business. 

The following commentary assumes that you are a UK resident without student loans. You are the sole director of your SME and your only income is salary and dividends.  You may wish to:

• Pay a salary up to the reduced Employer’s National Insurance Threshold of £5,000 : £416.66 a month. 
• Pay dividends up to £45,270 so you remain below the higher rate tax (the basic rate band of £50,270 less salary of £5,000)
• This means that your tax liability will be £3,255:
• Salary of £5,000 is covered by your personal allowance
• Dividend of £7,570 is covered by your personal allowance
• Dividend of £500 is covered by your dividend allowance
• Remaining dividends of £37,200 taxed at 8.75% = £3,255

Compare this with the 2024-2025 tax year when your salary could be up to £758 a month/ £9,096 per annum to keep below the Employee’s National Insurance threshold which was £12.570 per annum.

If you claim NI employment allowance this is the most tax efficient director’s salary for 2025-2026

The NI employment allowance increases to £10,500 from 6th April, 2025 so if there are two directors who are employees of your business, it may be more efficient to pay each a higher salary. 

• Pay a salary up to £12,570 per annum:  £1,047.50 per month
• Pay dividends up to £37,700
• The individual’s tax liability will be £3,255:
• Dividend of £500 covered by the dividend allowance
• Dividend of £37,200 taxed at 8.75% producing a personal tax liability of £3,255.

In addition, your company will enjoy a greater corporation tax saving of around £1,800 as the higher salary payment is a tax deductible expense

Any salary paid by your business is a tax deductible expense including salary paid to your spouse, civil partner or other family member. They must be genuinely supporting you in the business if you choose to pay them a salary. 

Need bookkeeping support? 

Hour Hands has the bookkeeping support you need for your business or personal life. From preparing for tax returns, to reconciling payments; from payroll to invoicing, our team is here to support you with those regular tasks and those urgent activities that you just never seem to get round to completing. Outsourcing your tasks, and enjoy flexible support when you need it – be it on an ongoing basis or for resolving a particular challenge. 

To find out more simply visit our website or call us on 01727 818262. We will ask how we can support you and offer a solution either on an hourly rate or package cost. The choice is yours – we simply want to help.