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Maximising Director Remuneration in 2025/26
Remuneration is the way in which you extract funds from your company. Where an individual is an owner (shareholder) of a company and a director, there are many ways in which they can extract funds from their company to use personally. These include salary, bonus, dividends and pension contributions. Getting the right remuneration package is key to maximising tax efficiency and ensuring compliance with HMRC regulations. With the 2025/26 tax year introducing changes to salary thresholds and National Insurance (NI) contributions, it’s more important than ever for directors to review their pay structure carefully to optimise their income.
Salary vs. Dividends: Finding the Right Balance
Directors of owner-managed businesses typically take income through a mix of salary and dividends. Each has distinct tax and NI implications:
For 2025/26, the Dividend Tax rates are:
* Individuals with income above £100,000 lose some, or all of their personal allowance depending on level of total taxable income
** The first £500 of dividend income is taxed at 0% regardless of other income received in the year. Depending on individual circumstances the dividend allowance can either be included within the personal allowance or in addition to the personal allowance.
Salary Thresholds and NI Contributions
Key salary thresholds for directors in 2025/26 are:
For 2025/26, the personal allowance remains at £12,570, which is set to be frozen until April 2028. Directors often set their annual salary below this amount to save paying National Insurance Contributions (NIC) and reduce overall tax liabilities. However, the Secondary Threshold (ST) will be reduced to £5,000 starting from 6 April 2025, a substantial decrease from the 2024/25 limit of £9,100. This new threshold is now less than the Lower Earnings Limit (LEL) for the 2025/26 tax year of £6,500, the minimum salary required to qualify for State Pension benefits.
To ensure eligibility for the State Pension while saving NIC costs, a minimum salary of £6,500 is advisable for most directors. This will trigger employer NIC costs of around £225, but it will guarantee that the director receives the necessary National Insurance contributions for the tax year, ensuring they qualify for State Pension benefits.
In some cases, it may be more advantageous for the director to take a higher salary, especially if the company can benefit from the Employment Allowance. Starting on 6 April 2025, the Employment Allowance will increase from £5,000 to £10,500, and almost all employers (except those with a sole director/employee) will be eligible. This could make it more beneficial for directors to take a higher salary, potentially up to the personal allowance limit of £12,570. This strategy can minimise NIC liabilities, and the salary would be deductible for Corporation Tax purposes, unlike dividends, which are not tax deductible.
Worked Example: Salary and NI Implications
For the 2025/26 tax year, the applicable NI rates are as follows:
For the 2025/26 tax year, the applicable NI rates are as follows:
Scenario 1: Salary at £5,000 (ST)
- No income tax or employee NI due
- No employer NIC liability
- Does not qualify for State Pension entitlement (as earnings are below the LEL)
- Remaining income taken as dividends
Scenario 2: Salary at £6,500 (LEL)
- No income tax or employee NI due
- Ensures State Pension qualification
- Employer NIC payable: £225
- Remaining income taken as dividends
Scenario 3: Salary at £12,570 (PT)
- No income tax or employee NI due
- Employer NI payable: £1,136
- Increased Corporation Tax relief due to higher salary costs
Key Takeaways
Every director’s situation is unique, and it’s important to tailor the salary and dividend strategy to an individual circumstances. While a minimum salary of £6,500 can be a smart choice for many, there are also circumstances where a higher salary or a different approach could be more tax efficient. For more tailored advice, please feel free to reach out to us.