All you need to know about paying directors’ salaries in 2025/26
What is the optimum director’s salary for 2025/26?
The optimum director’s salary for 2025/26 is £12,570 per annum. The is due to the changes in National Insurance Contribution (NIC) rates from April 2025, which are summarised below:
Why not pay a director’s salary of £5,000?
In previous years, it has been recommended to pay optimum salaries up to the Secondary Threshold. It was £9,100 in tax year 2024/25 and paying a salary up to the secondary rate avoided PAYE, employee’s NIC and employer’s NIC. However, the Secondary Threshold has dropped to only £5,000 for 2025/26.
Our recommended optimum salary of £12,570 will mean employers are liable to employer’s NIC, but this level of salary saves more in Corporation Tax.
What is the Corporation Tax saving?
The extra employer’s NIC totals £1,136 (£7,570 at 15.0%) but the Corporation Tax saved is at least £1,654 (£7,570 at 19% + £1,136 at 19%).
The Corporation Tax saved increases to £2,307 at the higher tax rate of 26.5% (calculation is £7,570 at 26.5% + £1,136 at 26.5%).
Should I pay nil salary?
A company can pay a director (who is also a shareholder) through either salaries or dividends. However, in most cases we recommend a salary should be paid as it is a tax-deductible expense. A dividend paid is not a tax-deductible expense for the company.
Therefore, paying a salary of £12,570 to the director saves Corporation Tax of anywhere between £2,388 and £3,331. There is no Corporation Tax saving if dividends are paid. Also, by paying a salary of £12,570, you are ensuring another qualifying year for the state pension is added.
Should I pay a higher salary?
All taxpayers have personal allowances in which they can earn income tax free. As soon as these allowances are used up, tax rates are applied. When income exceeds £12,570 per annum, both NICs and Income Tax are payable.
The NIC and Income Tax rates combined are higher than the dividend tax rate. Even when accounting for the Corporation Tax reduction on the salaries, paying dividends is still more tax efficient.
Can I claim the employment allowance?
The employment allowance allows a company to reduce their employer’s NIC liability by up to £10,500 per annum. This is a significant increase from the 2024/25 tax year, which was only a £5,000 reduction.
Unfortunately, the employment allowance is not available to all businesses. A company must have more than one director or employee to be able to claim the allowance, so a Limited company with a sole director cannot claim the employment allowance.
If your company is eligible for the employment allowance, we will automatically submit the claim with your payroll.
Conclusion
The optimum salary for a director in 2025/26 is £12,570. This ensures the taxpayer qualifies for the state pension but does not need to pay any employee contributions. The increased employer’s NICs will be offset by savings in Corporation Tax.
Need more help?
ADM Accountancy has been supporting businesses with tax advice and planning since 2009. If you would like more detailed remuneration planning, for example if you have other sources of income, such as pensions, we’d love to hear from you.
Please call us on 01242 679797 or email andrew@admaccountancy.co.uk or visit our website to find out more: admaccountancy.co.uk
ADM Accountancy Services Ltd.