How to be tax efficient as a company director in 2025/26

March 17, 2025 Posted by Helen Delbridge

How to be tax efficient as a company director in 2025/26

With the changes announced in the Chancellor’s Autumn 2024 budget now coming into effect, it is important for businesses and individuals to plan their tax affairs in a tax efficient way. Tax planning has become even more crucial in an environment where tax thresholds are constantly shifting and the political landscape ever changing. One key area of focus for owner-managed businesses and SMEs will be determining the most tax efficient directors’ salaries to optimise both the director’s and company’s tax position. The Chancellor announced several changes last Autumn that will affect limited company directors in the upcoming 2025/26 tax year. This blog will provide ways to navigate these new legislative changes.

Key Changes

The 2024 Autumn Budget introduced the following changes:

The employer’s national insurance contribution (NIC) rate will increase from 13.8% to 15% from April 2025.
The threshold for employer’s NICs (the secondary threshold) will be reduced from £9,100 to £5,000 from April 2025.
The employment allowance will increase to £10,500, up from £5,000, from April 2025. This means eligible employers will be able to reduce their annual NIC liability by up to £10,500. To be eligible for the employment allowance, the company must have employer’s class 1 NICs less than £100,000 in the prior tax year. The employment allowance isn’t available for sole director only payrolls, so the payroll must be run for either one non-director, or at least two employees if one of them is a director, who earn more than the secondary threshold. The restrictions around the employment allowance only being available for one company in a group (also known as connected companies) still applies.

What is the most tax efficient salary?

For the tax year ending 5 April 2026, the tax efficient salary topped up with dividends approach continues to be tax efficient. The optimum level of salary and dividends will depend on the company’s and director’s personal circumstances. The most common circumstances are given below.

Scenario 1a: Sole director with no employees

This scenario will mean that the company is not eligible for the employment allowance.

Here an annual salary of £5,000 is paid; as the company will not qualify for the employment allowance, this salary is set at the second threshold. No income tax or national insurance liabilities will arise but, as the salary is below the Lower Earnings Limit of £6,500 this will not be a qualifying year for state pension purposes for the director.

The remaining remuneration from the company will then be in the form of dividends. The director could take £45,270 in the year to take their level of income up to £50,270, being the top of the basic rate band. This assumes that the director has no other taxable income.

Scenario 1b: Sole director with no employees

In this scenario a salary of £6,500 is paid. Whilst a small employer’s NIC liability of £225 arises, no income tax or national insurance liabilities arise for the employee and the director will earn a qualifying year for state pension purposes.

As in scenario 1b, the remainder of the director’s remuneration can then be paid as dividends.

Scenario 2: More than one director or employee

Depending on the particular circumstances, if the company has multiple directors or employees, the company may then be eligible for the employment allowance.

In this instance a salary of £12,570 is paid. No income tax or national insurance will be payable by the employee or employer (on the basis that the employment allowance covers the employer’s NICs). This will also be a qualifying year for state pension purposes and the higher salary means greater corporation tax relief for the company.

The balance of the director’s remuneration can then again be paid in dividends.

Next Steps

To prepare for these changes, you should consider:

Checking your payroll and tax status – If you are employed, check how the national insurances changes will impact your salary and how you will be affected.
Plan for long-term effects – In the long run, these increases and changes could impact the company’s and your personal finances. Planning ahead will give a clearer picture of what to expect.
Contact Wellden Turnbull today – We have a dedicated team of tax advisers and accountants who can assist all your business’s needs, especially with regards to these changes. Whether you’re a business owner or an individual, our team is committed to helping you navigate complex financial landscapes and achieve long-term financial success.

Summary

Overall, the most tax efficient directors’ salary is very much dependent on your company’s circumstances. The particular level of salary and dividends will be dependent on the number of directors/employees as well as other factors such as whether the company is entitled to the employment allowance and what rate of corporation tax the company pays.

Get in touch

If you need further guidance on the changes and how they will impact your business, please contact us at: info@wtca.co.uk