Director's Salary Guide 2025/26: Two Clear Paths to Tax Efficiency

As a limited company director, you face a key decision: how to pay yourself most effectively. In the 2025/26 tax year, there are two primary salary strategies to consider, each suited to different income needs and business structures.

The Two Main Salary Options:

1. £6,500 per Year (£541.66/Month): This option prioritises minimal upfront cost and state pension qualification, ideal for directors primarily relying on dividends.

2. £12,570 per Year (£1,047.50/Month): This option maximises your allowance and reduces corporation tax, suitable for directors needing a larger regular income.

Which path is right for you? Let's explore the details.

Detailed Breakdown of Salary Options:

1. £6,500 per Year (£541.66/Month): Prioritising State Pension and Dividends

• Best for: Sole directors primarily extracting profits as dividends.

• Pros:

  • Meets the Lower Earnings Limit, ensuring State Pension eligibility.

  • Minimises immediate salary-related costs.

• Cons:

  • Incurs a small Employer NI obligation (approx. £225/year).

  • Does not fully use the personal allowance.

2. £12,570 per Year (£1,047.50/Month): Maximising Allowance and Reducing Corporation Tax

• Best for: Directors needing a larger regular income from the company.

• Pros:

  • Uses the full Personal Allowance (no income tax).

  • Maximises corporation tax relief.

  • Ensures state pension eligibility.

• Cons:

  • Triggers Employer NI contributions (approx. £1,135.50/year) - This is an allowable expense for Corporation Tax.

Specific Scenarios:

• Sole Directors with No Other Employees:

  • Both the £6,500 and £12,570 options are viable. The choice depends on your income requirements and priorities.

• Companies with 2 or more Directors or at least 1 Additional Employee:

  • The £12,570 option is strongly recommended to utilise the £10,500 Employment Allowance, which can potentially eliminate Employer NI contributions.

Key Financial Thresholds for 2025/26:

• Personal Allowance: £12,570 (Income tax-free amount)

• Employer's NI Threshold (Secondary Threshold): £5,000 (Above this, your company pays Employer's NI)

• Employee's NI Threshold (Primary Threshold): £12,570 (Above this, you pay Employee's NI)

• Lower Earnings Limit: £6,500 (Qualifies for State Pension credits)

• Dividend Allowance: £500 (Tax-free dividend income)

• Employment Allowance: £10,500 (Reduces Employer NI liability, available in certain circumstances)

Understanding the Thresholds:

• The Personal Allowance is the amount of income you can earn before paying income tax.

• The Employer's NI Threshold determines when your company starts paying National Insurance contributions on your salary.

• The Employee's NI Threshold determines when you, as the employee, start paying National Insurance contributions on your salary.

• The Lower Earnings Limit is the minimum income needed to qualify for a year of State Pension contributions.

• The Dividend Allowance is the amount of dividend income you can receive tax-free.

• The Employment Allowance is an allowance that can be claimed by companies that have multiple employees.

Key Considerations:

• Cash Flow: Balance NI costs with corporation tax savings.

• State Pension: Ensure at least £6,500 to qualify.

• Employment Allowance: Check eligibility for NI savings.

• Additional Income: Factor in other income sources.

• Dividend Strategy: Plan carefully due to the reduced £500 allowance.