Millward, May & Co - Wokingham Accountants
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📢 2025/26 Director Salary Strategy: What Business Owners Need to Know

📢 2025/26 Director Salary Strategy: What Business Owners Need to Know

If you’re a limited company owner, setting the right salary is one of the most effective ways to optimise your tax position while continuing to build up qualifying years towards your state pension.

 

💷 What’s the Generally Recommended Salary for Directors?

Dividends vs Salary – 2025/26 Tax Year

From April 2025 onwards (i.e. the 2025/26 tax year), it usually makes sense to pay a salary of ÂŁ12,570 per year (or ÂŁ1,047.50 per month). This is generally recommended because:

  • It’s above the Lower Earnings Limit (ÂŁ6,396), so it counts as a qualifying year for your state pension—you currently need at least 10 qualifying years to receive any State Pension, and 35 years to receive the full amount

  • It is more tax-efficient than dividends at this level. Dividends would be charged at a marginal rate of between 19-26.5% corporation tax whereas a salary would be subject to a maximum of 15% employer national insurance above ÂŁ5,000.

🤔 When Should I Pay Myself More Than £12,570 in Salary?

This is a really complicated area, and honestly, we’ve spent hours working through different scenarios. What we’ve concluded is that it’s definitely not a one-size-fits-all answer — it really depends on your specific situation.

That said, in some cases, taking more salary can be the most tax-efficient option. For example:

  • If your company profits are over ÂŁ50,000 or you have connected companies, and

  • Your personal income is significantly under ÂŁ50,000, and

  • Your company is able to claim the employers allowance.

This often applies to two-director companies where profits are healthy, but both directors are taking modest incomes.

As we do every year, we’ll carry out a full year-end limited company review to ensure you’re set up as efficiently as possible. If we identify that taking a bonus before your company year end would save tax, we’ll be in touch to advise on the best way to do it.

⚠️ When Should I Pay Myself Less Than £12,570 In Salary?

While ÂŁ12,570 suits most director/shareholders, there are circumstances where another approach may be more appropriate:

  • You’re receiving other income (e.g. a salary from another business, pension, or large property/investment income)

  • You’re state pension age and so don’t pay National Insurance

  • Your company is loss-making, or you’re not a shareholder, so you’re unable to pay yourself dividends

📉 What’s Changed with Employer’s National Insurance from April 2025?

From April 2025, a few big changes came into effect:

  1. The Employer’s National Insurance rate increased from 13.8% to 15.0%

  2. The point at which Employer’s NI becomes payable decreased from £9,100 to £5,000 per year (or £417 per month)

  3. However, the employment allowance has increased from ÂŁ5,000 to ÂŁ10,500

This means a director being paid £12,570 will now incur an Employer’s NI liability of approximately £1,136 per year—an increase of £657 from the previous year. Even with this increase, £12,570 per year is still the most tax-efficient salary level for most limited company owners.

🧾 Employment Allowance

The Employment Allowance allows eligible businesses to reduce their Employer’s NI bill by up to £10,500 per year.

This allowance is available to most businesses who have an employee on payroll earning above ÂŁ5,000 per year (or ÂŁ417/month).

However, it is not available in these circumstances:

  • If you are a sole director with no other employees

  • If the company is part of a group of connected companies (only one company in that group can claim the allowance)

  • If you are someone whose earnings are solely within IR35 “off-payroll working rules”

👥 Should Sole Director Companies Employ Additional Staff?

For some businesses, employing an additional staff member could allow access to the Employment Allowance and help recover the increased NI costs.

In many cases, directors already receive informal help from their partners, family members or friends—with admin tasks like invoicing, chasing payments, paying suppliers, bookkeeping, personal assistant duties, etc.

If this support is genuine and regular, you might consider employing them formally. This must be done correctly, including:

  • Providing a contract

  • Meeting minimum wage requirements

  • Paying holiday entitlement and pension contributions if applicable

  • Offering a fair, market-appropriate wage for the work done (for example, it wouldn’t be reasonable to pay ÂŁ100/hour for basic admin. Imagine you weren’t personally connected to the person - what would you realistically pay?)

📌 Thinking about it? We can help you assess whether employing someone makes financial and legal sense for your business.

💬 Need Help With Your Salary Strategy?

The most tax-efficient salary depends on your total income, goals, and company structure. If you're unsure what's best for your situation—or considering employing someone to help qualify for Employment Allowance—we're here to guide you through it.

Millward, May & Co