Directors Optimum Salary 2025/26

Every new tax year, Directors of limited companies face the challenge of determining the most tax-efficient salary to draw from their company.  With the recent updates to Employers National Insurance revealed in the Chancellor’s October 2024 budget, this choice has become even more challenging for the upcoming 2025/26 tax year.  Below are the main options to consider this tax year.

Director putting coins arranged in steps - calculating future income

For 2025/26 the personal allowance in England and Wales remains at £12,570 – this means your first £12,570 of income is tax free.

In addition to this the higher tax band remains at £50,270 for this year.

For income above this the tax rates are as below (different rates apply to dividends)

·        £12,570 to £50,270               20%  

·        £50,271 to £125,140             40%  

·        £125,141+                            45%

Scottish resident taxpayers have slightly different tax bands.

The dividend allowance is £500.00

Over and above this £500, the dividend income is taxed as below.

·        If you have any un-used personal allowance (£12,570), that element is tax free.

·        Any dividends in the basic tax band (up to £50,270) attract a tax charge of 8.75%

·        Dividends above the basic tax band (over £50,270) are charged at 33.75%

·        Any dividends in the upper tax band (£125,141+) are taxed at 39.35%.

What are the changes for 2025/26?

There are two significant updates to bear in mind when determining the most tax-efficient salary for directors.  Firstly, the employer’s National Insurance threshold has been reduced from £9,100.00 per year to £5,000.00 per year.  Secondly, the rate of employer’s National Insurance has increased from 13.8% to 15%.  

These changes underscore the need to carefully assess the optimal salary level for directors.

Door Threshold - Red Steps with mats

What are the 2025/26 key thresholds to consider?

The primary thresholds to consider when deciding on the most tax-efficient director salary are:

·        £12,570.00 is both the income tax personal allowance and employee NI threshold, meaning any earnings at or below this amount are income tax-free and employee NI free.

·        £5,000.00 is the employer's NI threshold, meaning any earnings below this amount are employer NI free.

·        £6,500.00 is the lower earnings limit, meaning this is the minimum amount an employee must earn to receive a qualifying year towards the State Pension.

What is the most tax-efficient director salary for a single director payroll?

If you, as the director, are the only person on the payroll, there are three main options available:

Option 1 - £5,000.00 per year / £416.66 per month

·        No tax or NI due

·        No state pension tick as it is below the lower earnings limit

·        Corporation tax relief on salary – minimum* of £950.00pa

·        Overall minimum* tax saving of £950.00pa

Option 2 - £6,500.00 per year / £541.66 per month

·        £225.00 employers’ NI due per year

·        Qualifying year towards state pension

·        Corporation tax relief on salary – minimum* of £1,277.75pa

·        Overall minimum* tax saving of £1,052.75pa

Option 3 - £12,570.00 per year / £1,047.50 per month

·        £1,135.50 employers’ NI due per year

·        Qualifying year towards state pension

·        Corporation tax relief on salary – minimum* of £2,604.05pa

·        Overall minimum* tax saving of £1,468.55pa

The calculations assume that you have no other sources of income outside your limited company.

Conclusion – Option 3 offers the greatest overall tax savings for a single director payroll. You can see that the higher the salary, the greater the corporation tax saving. If you are a sole director payroll, you will pay employers NI, but the corporation tax saved far outweighs this liability.

Directors chair and clapperboard

What is the most tax-efficient director salary for a payroll with more than one employee?

If your business employs more than one person, including directors, the best approach changes slightly. With multiple employees on the payroll, your company can take advantage of the employer’s allowance. This allows the company to avoid paying employer’s National Insurance contributions up to the allowance of £10,500 per year.  Therefore when you have additional employees on the payroll, setting your salary at £12,570 helps you avoid any tax and National Insurance due to the employer’s allowance while still earning your qualifying year for the state pension.

The optimum recommended director salary when there are other employees on the payroll is therefore:

£12,570.00 per year / £1,047.50 per month

·        No tax or NI due

·        Qualifying year towards state pension

·        Corporation tax relief on salary – minimum* of £2,388.30pa

·        Overall minimum* tax saving of £2,388.30pa

The calculations are again based on the assumption that you have no other sources of income outside your limited company.

*The minimum corporation tax relief is calculated using the lower corporation tax rate of 19%.

How this works in principle

When it comes to tax efficient salary levels for 2025/26 there are three national insurance thresholds you need to be aware of:

·        Lower Earnings Limit – paying a salary above protects your entitlement to future state pension and benefits, without paying any national insurance. For 25/26 this is £6,500 this year.

·        Primary Threshold – earnings above this threshold and you personally must start paying national insurance – for 25/26 this is £12,570 this year

·        Secondary Threshold – earnings above this threshold and your business must start paying national insurance – for 25/26 this is £5,000 this year

Why not pay £nil salary?

A salary paid is a tax deductible whereas a dividend paid is not a tax-deductible expense for the company.  Therefore, paying a salary of 12,570 to the director reduces corporation tax.  There is no such saving on dividend payments. Also, by paying a salary of £6,500 or above you are ensuring another qualifying year for the state pension as mentioned above.

Caveats

All calculations, assume the following:

·        You are resident in the UK.

·        You don’t have an outstanding Student Loan.

·        Your only income is your salary and dividends from your company.

·        You are not working inside of IR35.

·        You have a standard personal tax allowance.

·        Your company has sufficient post tax profits to support these dividends.

How to optimise salary and dividends for directors in 2025-26?

With regards to dividends, assuming you wish to take dividends up to the higher tax band but no further, then this would leave you with £37,700 of dividend headroom (£50,270 higher tax band – £12,570 salary).

The personal tax on dividends of £37,700 would total £3,211.25 – this is calculated as below:

·        None of the dividends are in the tax-free personal allowance

·        £500 of the dividends are in the tax-free dividend allowance.

·        This then leaves the balance of dividends totaling £36,700 to be taxed at 8.75% = £3,211.25

This will give you a net monthly income of £3,921.56

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