You may wish to change how you pay a director’s salary and dividends due to the changes to Employer’s National Insurance Contributions (NICs) announced in the October budget. NICs are not payable on dividends so despite salaries being tax deductible, the optimum balance between paying a salary and a dividend may have shifted – depending on how many directors are in your business. If you are a director or shareholders of a small, limited company, read on to find out more.
The most tax efficient director’s salary for 2025-2026
The following guidance assumes that you are a UK resident without student loans.
If you are the sole director and employee of your business, meaning you do not claim the NI employment allowance, this is the most tax efficient director’s salary for 2025-26:
- 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)
- If you do the above, 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 employees working in 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
Director’s salaries – good to know
It’s good to know that a director’s salary is a tax deductible expense for your company, as is any salary paid to your spouse, civil partner or other family member, if they are supporting you in the business.
It is possible to pay a salary that doesn’t create a National Insurance liability and this salary counts towards your national insurance record for state pension.
Another great way to extract wealth from your business is via your company pension scheme.
How can we help?
HB is always available to support your accountancy needs and discuss ways to boost your productivity.
If you would like to learn more about the services that we offer including personal and corporate tax services, discover how we can give you real confidence in the future of your business, or if you are a larger business that requires auditing, then contact us today. We’re accountants for business and we are here to help you grow and save efficiently.
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The information contained above is for general guidance purposes only. Whilst every effort has been made to ensure the contents are accurate, please note that each individual has different circumstances and it is essential that you seek appropriate professional advice before you act on any of the information contained herein. HB Accountants can accept no liability for any errors or omission or for any person acting on or refraining from acting on the information provided in the above
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