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Sarah Blundell is a Fellow of the Association of Chartered and Certified Accountants (ACCA) and has more than 20 years of experience in the accounting field. As the founder of her own practice, she focuses on delivering outstanding fully digital services tailored for small businesses.
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Introduction
Each new tax year, limited company directors face the challenge of determining the most tax efficient salary to draw from their company. With the recent updates revealed in the Chancellor’s October 2024 budget, this choice has become even more challenging for the upcoming 2025/26 tax year. We outline the main options and considerations to assist you in making a well-informed decision.
What are the changes for 2025/26?
There are two important updates to keep in mind when determining the most tax-efficient salary for directors. Firstly, the employer’s National Insurance threshold has been reduced from £9,100.00 per year to £5,000.00 per year. Secondly, the rate of employer’s National Insurance has increased from 13.8% to 15%. These two changes emphasize the need to carefully assess the optimal salary level for directors.
What are the 2025/26 key thresholds to consider?
There are four main thresholds to consider when deciding the most tax-efficient director salary:
- £12,570.00 is the income tax personal allowance, meaning any earnings below this amount are income tax free.
- £12,570.00 is the employee NI threshold, meaning any earnings below this amount are employee NI free.
- £5,000.00 is the employers NI threshold, meaning any earnings below this amount are employer NI free.
- £6,500.00 is the lower earnings limit, meaning this is the minimum amount an employee must earn to receive a qualifying year towards the State Pension.
What is the most tax efficient director salary for a single director payroll?
If you as the director are the only person on the payroll, there are three main options available to you which we have detailed below:
- £5,000.00 per year / £416.66 per month
- No tax or NI due
- No state pension tick as it is below the lower earnings limit
- Corporation tax relief on salary – minimum* of £950.00pa
- Overall minimum* tax saving of £950.00pa
- £6,500.00 per year / £541.66 per month
- £225.00 employers’ NI due per year
- Qualifying year towards state pension
- Corporation tax relief on salary – minimum* of £1,277.75pa
- Overall minimum* tax saving of £1,052.75pa
- £12,570.00 per year / £1,047.50 per month
- £1,135.50 employers’ NI due per year
- Qualifying year towards state pension
- Corporation tax relief on salary – minimum* of £2,604.05pa
- Overall minimum* tax saving of £1,468.55pa
*The minimum corporation tax relief is calculated using the lower corporation tax rate of 19%.
The calculations are based on the assumption that you have no other sources of income outside of your limited company.
Conclusion – option 3 offers the greatest overall tax savings for a single director payroll. You can see that the higher the salary, the greater the corporation tax saving. If you are a sole director payroll you will pay employers NI but the corporation tax saved far outweighs this liability.
What is the most tax efficient director salary for a payroll with more than one employee?
If your business employs more than one person, including directors, the best approach changes a bit. With more than one employee on the payroll, your company can take advantage of the employer’s allowance. This allows the company to avoid paying employer’s National Insurance contributions up to the allowance of £10,500 per year.
The optimum recommended director salary when there are other employees on the payroll is therefore:
- £12,570.00 per year / £1,047.50 per month
- No tax or NI due
- Qualifying year towards state pension
- Corporation tax relief on salary – minimum* of £2,388.30pa
- Overall minimum* tax saving of £2,388.30pa
Final conclusion
Assuming that your limited company is your only income source and cash flow is not an issue, the optimum director salary for 2025/26 is set at £12,570.00. Our reasoning behind this decision is:
- No income tax is due below £12,570.00
- No employee NI is due below £12,570.00
- You receive the qualifying year towards your state pension
- You receive corporation tax relief of a minimum* £2,388.30pa
- For single director payrolls, employer’s NI is payable at £1,135.50pa, but this is outweighed by the corporation tax saving you will make from your salary being an allowable expense
*The minimum corporation tax relief is calculated using the lower corporation tax rate of 19%.
If you run a payroll where tax & NI is due, we encourage you to action the below:
- Set up a company HMRC login if you don’t have one already
- Add PAYE as a service
- Setup a Direct Debit so you don’t need to remember to make payment each month
It’s important to remember that everyone’s situation is unique. If you’re uncertain about what salary would suit you best and need some advice, don’t hesitate to get in touch – we’re here to help! Feel free to reach out to us directly at hello@simpletaxes.co.uk .
Disclaimer
The information contained in this blog is for general information purposes only, and not for accounting and tax advice. You should speak to a qualified professional about your specific circumstances before acting upon any of the information in this blog.
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Last Updated: April 2025
