What is the Optimum Director's Salary 2025/26?

Rachel Reeves’ October budget for 2024 brings some significant updates that will impact both personal and business taxes. One of the most discussed changes is the lowering of the Employer’s National Insurance threshold. This means that businesses will now have to pay National Insurance contributions on employee earnings that exceed £5,000, down from the previous limit of £9,100.

Limited company directors often choose to pay themselves a combination of salary and dividends to keep their tax bills in check. By setting a low salary - usually at the National Insurance threshold, they can minimize tax liabilities while still being eligible for state benefits. The rest of their income typically comes in the form of dividends, which are taxed at lower rates compared to salaries.

However, with the new changes to the National Insurance threshold and tax bands, directors will need to rethink how they take money out of their companies. This reduction in the Employer’s National Insurance threshold could lead to higher overall costs if their salary goes beyond the new limit.

In this article, you can read our salary guidance on optimum directors salary for 2025/26.

Before diving into our recommendations for the year ahead, it’s useful to understand why this change has an impact and so to provide full insight, let’s take a look at the other important thresholds relevant to this:

• Tax Free Personal Allowance -  Frozen at £12,570
• Employee’s National Insurance Threshold - Frozen at £12,570
• Lower Earnings Limit (LEL) – Frozen at £6,500 (important for state pension qualification)
• Tax Free Dividend Allowance – Frozen at £500
• Employment Allowance - £10,500 (offsets Employer NI for eligible companies)
• Employer’s NI Rate - 15% (Applies to earnings above £5,000 unless covered by the Employment Allowance)
• Employer’s National Insurance Secondary Threshold – Reduced to £5,000

As we can see, for the first time in a long time, the threshold in which you’ll begin to pay Employers National Insurance is now below the threshold needed to maintain your National Insurance record for state pension qualification. This means that for a lot of small businesses, the director will have to start paying some Employers NI to continue to obtain eligibility for state pension.

Opting to pay yourself a salary has a number of benefits:

• Maximises Your Tax-Free Personal Allowance – The personal allowance for 2025/26 is £12,570. By taking a salary up to this amount, you can keep it completely tax-free.
• Enables You to Qualify for State Pension and Benefits – Earning above the Lower Earnings Limit can qualify you for your state pension and benefits.
• Lowers Corporation Tax – Since salary counts as a business expense, it reduces your company’s taxable profits, which ultimately leads to lower corporation tax.
• Keeps National Insurance (NI) Costs Low – A well-planned salary structure can help keep your NI contributions low, allowing you to retain more of your earnings.

TLDR - following the changes to Employers NI, we would recommend an increase in directors salaries to £12,570 per annum to maintain NI records and maximise tax relief (assuming no other sources of income outside of the company) 

Your ideal salary depends on whether you are the sole director or have other employees on the payroll. Here are the three most tax-efficient director's salary options for 2025/26:

1. If you are a sole director with no other employees

If you are the sole director in your company, you have three choices for your salary.

Option 1. £5,000 annual salary (£416.66 per month) – less admin

This salary aims to avoid any arising tax/NI charges. However, you do not obtain a qualifying year towards your state pension and your Corporation Tax relief is reduced compared to prior years.

Option 2. £6,500 annual salary (£541.66 per month) – somewhere in the middle

This salary aims to maintain your NI record by meeting the Lower Earnings Limit. Your company will incur a small Employers National Insurance liability (£225) and your Corporation Tax relief will be less than in prior years. 

Option 3. £12,570 annual salary (£1,047.50 per month) – maximum savings (GoForma’s recommendation)

This salary maximises your tax-free personal allowance. Your company will incur a higher Employers National Insurance liability (£1,135.50) but this will be covered even more so by the higher Corporation Tax relief. This is the most tax efficient option.

2. If you have 2 or more paid employees including directors

If your company has two or more directors/employees receiving a salary, your decision for your director’s salary level is easier.

A company with two or more employees/directors receiving salary above £5,000 are eligible to utilise an allowance called ‘Employers Allowance’. This is where the first £10,500 of Employers NI is not payable.

With this in mind, our recommendation would be for each director to be paid a salary in line with the tax-free personal allowance of £12,570 per annum.

Your salary must meet the Lower Earnings Limit (LEL) of £6,500 to qualify for state pension for the 2025/26 tax year.

• If you earn less than £6,500, that income won’t count as a qualifying year, meaning you won’t get any state pension credits.
• On the flip side, if you earn £6,500 or more, that counts as a full year towards your state pension, which is great for securing your future benefits.

By keeping your salary above the LEL, you can keep building your state pension entitlement without having to pay extra National Insurance.

Dividends: A Tax-Efficient Alternative

After you’ve set your salary, dividends can be a clever way to enhance your income while keeping your tax bills in check.

Why Opt for Dividends?

• No National Insurance Contributions (NICs) – Unlike your salary, there are no NICs on dividends.
• Paid After Corporation Tax – Dividends are paid out from the company’s profits after corporation tax is applied.
• £500 Tax-Free Dividend Allowance – You can benefit from first £500 of dividends completely tax-free.
• Lower Tax Rates - If your total income from dividends is up to £50,270, you'll only pay an 8.75% tax on that, which is a lot more favorable than the tax rates on salaries.

By combining a well-thought-out salary with dividends, you can effectively lower your tax liability, making this approach one of the smartest ways for director's take home pay.

Single Director Companies

If you already have a salary running through your business in line with our current recommendation (£758 per month) and are happy to continue with our recommendation, you do not need to do anything – we will automatically raise your salary to £12,570 (£1,047.50 per month). Please adjust your salary payments for April 2025 onwards.

If you do not have a salary currently, or have a specified salary outside of our prior recommendation (£758 per month), this will continue in line with the current amount. Should you wish to change this or are unsure on what to do, please reach out to us.

Multi Director/employee Companies

If you already have a salary running through your business in line with our current recommendation (£1,047.50 per month) and are happy to continue with our recommendation, you do not need to do anything. This will automatically continue.

If you do not have a salary currently, or have a specified salary outside of our prior recommendation, this will continue in line with the current amount. Should you wish to change this or are unsure on what to do, please reach out to us.

If you're looking for the most tax-efficient way to pay yourself as a director in 2025/2026, a combination of salary and dividends is the way to go. The ideal salary for UK directors can be either £5,000, £6,500, or £12,570, depending on how many employees you have and your personal choice. The rest of your income can come from dividends, to benefit from the lower dividend tax rates.

For most owner-managed businesses, a salary of £12,570 is recommended. While the tax savings might not be as significant as in previous years due to the rise in employer National Insurance, this amount still tends to be the best option for many directors. We suggest that any additional income be taken as dividends.

By opting for a salary of £12,570, your company can save at least £2,388 in corporation tax.

If a director earns £50,270 through a mix of salary and dividends, they would face personal taxes of about £3,255. This results in an effective tax rate of roughly 6.5% on that £50,270 income.

It's important to note that these figures are based on several assumptions and may not apply to every director. The most tax-efficient salary really depends on your company's specific situation. Factors like the number of directors and employees, eligibility for the employment allowance, and the corporation tax rate your company pays all play a role in determining the right balance of salary and dividends.

If you're uncertain about the best strategy for your situation, don’t hesitate to reach out to our limited company accountant. At GoForma, we’re here to help you customise your salary and dividend strategy for maximum efficiency.