Running a small, limited company comes with its own challenges, and one of the biggest is ensuring you remain tax efficient. With changes announced in the 2024 Autumn Budget, it’s essential for directors and shareholders to rethink their salary and dividend strategies for 2025/26. Here’s a guide to help you navigate the most tax-efficient options. 

 

Key Assumptions 

Before diving into strategies, here are some assumptions we’re working with: 

• No additional income from other sources (e.g., property or investments). 

• Corporation tax is paid at the small company rate of 19%, so your profits are less than £50,000 per year.  

If your circumstances differ, it’s best to seek tailored advice. 

 

The Optimal Salary and Dividend Mix 

Historically, director/shareholders have balanced salaries and dividends to minimise tax. However, upcoming changes, especially to Employer National Insurance (NI) thresholds, means you need to check that your current strategy will still work for you in 2025/26. 

 

Tax Allowances and National Insurance Thresholds for 2025/26 

Let’s start by understanding the rates and thresholds that will apply from April 2025. 

 

Income Tax allowances for 2025/26 remain the same as for 2024/25. Personal Tax-Free Allowance: £12,570 annually. 

• Dividend Allowance: Reduced to £500. 

• Basic Rate Limit: £50,270. 

• Additional Rate Threshold: £125,140. 

 

The National Insurance thresholds have changed and are as follows:  

• Class 1 National Insurance Secondary Threshold (£5,000 annually) 

Earnings below this threshold are not subject to Employer NI. 

Paying yourself a salary at or below this level avoids NI liability for your company. 

• Lower Earnings Limit (LEL – £6,500 annually) 

If your salary exceeds this amount, you qualify for NI credits. 

These credits count towards your State Pension and other state benefits, even though no NI contributions are deducted. 

• Primary Threshold (£12,570 annually) 

Salaries at this level are covered entirely by the personal tax-free allowance, meaning no income tax is due. 

However, salaries exceeding the secondary threshold (£5,000) will incur Employer NI at 15%. 

 

Understanding these thresholds helps you make an informed decision on how to balance short-term tax efficiency with long-term benefits like the State Pension. 

 

Salary Scenarios for Sole Directors 

Here’s how you can structure your salary and dividends based on the thresholds: 

 

Scenario 1: Salary of £5,000 

A salary of £5,000 falls within the NI Secondary Threshold, meaning no NI liability for you or your company. 

Dividends of up to £45,270 could then be taken without exceeding the basic tax band for income tax purposes. The key trade-off with this strategy is that no NI contributions will be made so there will be no qualifying year for State Pension or other benefits. 

 

Example Calculation: 

Salary: £5,000 (no tax or NI due). 

Dividend: £45,270 (taxed at 8.75% after the £500 tax-free allowance). 

Total Personal Tax Liability: £3,255. 

 

Scenario 2: Salary of £6,500 

A salary of £6,500 matches the Lower earnings limit, meaning some NI will be paid and you will have credits to maintain your eligibility for State Pension and benefits. At this level of salary, you can pay up to £43,770 of dividends without exceeding the basic tax band. 

 

The Employers NI cost of this salary would be £225 for 2025/26. 

 

Example Calculation: 

Salary: £6,500 (no tax or employee NI deducted). 

Dividend: £43,770 (taxed at 8.75% after the £500 tax-free allowance). 

Total Personal Tax Liability: £3,255 + £225 Employer NI. 

 

Scenario 3: Salary of £12,570 

£12,570 salary will fully utilise your personal tax-free allowance and ensure you are eligible for maximum NI credits but as the salary is over £5,000 then Employer NI contributions will apply at a cost of £1,135 for the year. 

The upside of this additional cost is that corporation tax relief is available on both the salary and Employers NI costs. 

 

Leveraging the Employment Allowance 

For companies with two or more directors or employees, the Employment Allowance (£10,500 in 2025/26) offers significant savings. This allowance can be offset against Employer NI contributions, allowing a higher salary of £12,570 to be paid tax-efficiently. 

 

Choosing the Best Strategy 

Selecting the right salary depends on your priorities and isn’t always an easy decision.  

The best approach depends on your company’s setup and your financial goals, as there is no one-size-fits-all solution. 

A lower salary typically suits sole directors who want to keep things simple, while a higher salary benefits those eligible for the NI Employment Allowance by offering additional corporation tax savings. 

And a final thought. If you are a one director/employee company, is it time to consider employing additional support? By introducing an additional employee, you may become eligible for Employers Allowance, meaning the first £10,500 of Employers NI is not payable. 

Want more information to help you decide? Download our free guide to determine the tax efficient salary for you or get in touch now to discuss your personal situation in more detail.