Director’s Salary Guide 2025/26: Tax-Efficient Payment Strategies for Limited Companies

Understanding Your Salary Options as a Company Director

As experts working with hundreds of small business owners, we know how crucial it is to get your salary structure right. Finding the perfect balance between salary and dividends can save you thousands in tax each year.

Key Tax Changes for Company Directors in 2025

Employment Allowance Update

The employment allowance is the amount an employer can pay an employee before having to pay NI.  This has significantly increased:

– 2024/25: £5,000

– 2025/26: £10,500 (more than doubled)

– Available for businesses with employees or multiple directors

– Not available for sole director companies

This change creates new opportunities for small business tax planning, especially for family businesses.

 

Important Tax Thresholds

These key figures remain frozen:

– Personal Allowance: £12,570 (frozen until April 2028)

– Dividend Allowance: £500 tax-free

– Basic Rate Limit: £50,270

– Higher Rate Threshold: £125,140

 

Understanding these thresholds is essential for optimising director’s remuneration package.

Tax-Efficient Salary Options for Company Directors

Option 1: Solo Director – Minimal Salary Approach

Best for: Single-director companies focusing on short-term tax efficiency

– Monthly Salary: £416.6
– Annual Salary: £5,000
– Maximum Dividend Potential: £45,270 depending on profits. This amount is to stay in the lower tax bracket
– Expected Personal Tax: £3,255 (assuming no other income)
– Corporation Tax Saving on the corporation tax rate of 19%: £950

Important Note: This salary level won’t qualify for State Pension credits.

 

Option 2: Solo Director – Optimal Salary Strategy

Best for: Directors planning for long-term benefits

– Monthly Salary: £1,047
– Annual Salary: £12,570
– Maximum Dividend Potential: £37,700 This amount is profits dependant and is limited to this amount to stay in the lower tax bracket.
– Personal Tax: £3,255 (assuming no other income)
– Corporation Tax Saving based on 19%: £2,604.05

This approach maximises your tax-free personal allowance while building pension entitlement.

 

Option 3: Multiple Directors or Employees
Best for companies eligible for Employment Allowance.

– Director Salary: £12,570 annually per director
– Available Dividends: Up to £37,700 (as profit allows)
– Personal Tax (assuming no other income, per director): £3,255
– Business savings based on 19% corporation tax:: £2,388.30 (doubles to £4,776.60 for two directors)

Taking advantage of the increased Employment Allowance can substantially reduce your business costs.

 

Strategic Tax Planning for Directors

Factors to Consider

– Company profit levels
– Other income sources
– State Pension qualification requirements
– Long-term retirement planning
– Employment Allowance eligibility

Your Director salary and dividends are part of a bigger picture.  The best way to track what you can take is to put plans in place and know your numbers.

 

Tax Planning Tips

– Keep detailed financial records for HMRC compliance
– Plan ahead for tax payments to manage cash flow
– Review salary strategy annually as tax rules change
– Consider long-term pension implications beyond immediate tax savings
– Evaluate family employment opportunities to maximize allowances – the introduction of another person on payroll for a solo director means that the employment allowance can be accessed. However, this person does need to have a role within the business to justify the additional expense.

 

Making the Right Choice for Your Business

Every limited company is unique, and what works for one director might not work for another. Consider these aspects:

Business Factors:

– Annual profit projections
– Cash flow requirements
– Growth plans
– Employee considerations
– Corporation tax position

Personal Factors:

– Income needs
– Overall tax position
– Pension planning strategy
– Other income streams
– Future exit planning

Get Expert Tax Planning Support

Need help structuring your director’s salary? We can help you:

– Calculate your optimal salary level
– Plan dividend payments throughout the tax year
– Maximize tax efficiency with compliant strategies
– Ensure pension qualification through proper planning
– Review personal and business tax implications

Frequently Asked Questions About Director’s Salaries

What is the optimal director’s salary for 2025/26?

For most directors, the optimal salary is either £5,000 (if you have other pension arrangements) or £12,570 (to use your full personal allowance). The right choice depends on your specific circumstances, including whether you qualify for the Employment Allowance.

How much should I pay myself as a company director?

The ideal amount depends on several factors including your company’s profitability, whether you have employees, your pension needs, and your personal tax situation. Most directors benefit from taking a combination of salary and dividends to minimise tax.

Can I take all my income as dividends?

While taking only dividends might seem tax-efficient, it’s generally not recommended. A small salary ensures you maintain National Insurance contributions for State Pension purposes and allows your company to claim the salary as a business expense.

How does the employment allowance work in 2025/26?

The Employment Allowance allows eligible employers to reduce their annual National Insurance liability by up to £10,500 in 2025/26. To qualify, you need either multiple directors or at least one employee besides yourself. This can significantly impact your optimal salary strategy.

What’s the minimum salary needed for State Pension credits?

To qualify for State Pension credits, your salary needs to exceed the Lower Earnings Limit (LEL). A £5,000 salary falls below this threshold, potentially affecting your future pension entitlement.

 

Book a free 30-minute consultation to discuss your director’s salary options for 2025/26. We are here to help you navigate these important decisions.

Last updated: February 2025. Tax rules are subject to change. Please contact us for the most current advice.