Optimal Directors Salary for 2025/26

The most tax-efficient salary for directors in the 2025/26 tax year is £12,570 per year, which translates to £1,047 per month or £241 per week. This is the recommended amount for most directors to minimise tax liabilities.

Owner-managed businesses generally have the flexibility to decide on their method of remuneration—this can be through a salary, dividends, or a combination of both.

For directors who do not have any additional income, the ideal approach is to set their salary at £12,570 per year, with any further income taken as dividends.

Why is the optimal directors salary £12,570 in 2025/26?

The primary reason for this figure is based on National Insurance (NI) thresholds.

• Lower Earnings Limit: £6,500 per year – Earning above this ensures a qualifying year for your future state pension.

• Primary NI Threshold: £12,570 per year – Earning beyond this means the director must pay employee NI contributions.

• Secondary NI Threshold: £5,000 per year – Any salary above this amount incurs employer NI contributions.

The recommended approach for 2025/26 is to set the salary at exactly £12,570 and not a penny more. This ensures the director qualifies for the state pension without having to pay employee NI contributions. Yes, you read that right—you can secure state pension benefits without personally contributing to NI.

Isn’t £12,570 just the personal allowance?

Yes, the personal allowance and the employee NI threshold are now the same.

Since July 2022, the employee NI threshold has remained at £12,570, aligning it with the personal allowance.

Why Not Pay a £0 Salary?

A director (who is also a shareholder) can receive payments through either a salary or dividends.

• A salary is a tax-deductible expense for the company.

• Dividends, however, are not tax-deductible.

Corporation tax rates from April 2025 remain at 19%, 25%, and 26.5%, meaning paying a salary of £12,570 results in a corporation tax saving ranging from £2,388 to £3,331.

By paying a salary, the director also secures another qualifying year for state pension benefits.

When is a £0 Salary Advisable?

The £12,570 salary strategy is only beneficial if the director has available tax allowances.

If the director receives other income—such as a pension, another salary, rental income, or is already past pension age—then a £0 salary may be more appropriate.

Since incorrect calculations can result in unnecessary tax liabilities, it’s advisable to seek professional tax advice to avoid overpaying tax.

Why Not Pay a Higher Salary?

Every taxpayer has a personal allowance, and once this is exceeded, income tax and NI contributions apply.

If a director’s salary exceeds £12,570, both income tax and NI are due.

Even after accounting for corporation tax relief, taking additional income as dividends remains the more tax-efficient approach.

When Would a Higher Salary Be Advisable?

There are certain scenarios where paying more than £12,570 may be necessary:

1. Contract of Employment – If a director has an employment contract, they must legally be paid at least the National Minimum Wage (which may be higher than £12,570).

2. Dividend Restrictions – Dividends can only be issued if the company has available retained profits. If a company has previous losses, dividends may not be an option, leaving a higher salary as the only choice.

3. Tax Efficiency for Pensioners – Directors over state pension age do not pay employee NI, making a higher salary more viable.

4. Employment Allowance Available – If the company qualifies for Employment Allowance, the employer NI burden is reduced, making a higher salary potentially beneficial.

Every case is different, so tailored tax planning is essential.

Why Not Pay a Salary of £5,000 Instead?

Historically, directors were advised to set salaries at the secondary NI threshold to avoid PAYE, employee NI, and employer NI.

For 2025/26, this threshold has dropped to £5,000 (from £9,100 in 2024/25).

While this avoids NI, the corporation tax relief from paying £12,570 instead of £5,000 is greater, even though employer NI is due.

Tax Breakdown:

• Employer NI on £12,570: £1,136 (£7,570 × 15%)

• Corporation tax saved: At least £1,654 at 19% and up to £2,307 at 26.5%

The corporation tax saving outweighs the employer NI cost, making £12,570 the more tax-efficient option.

Can I Claim the Employment Allowance?

The Employment Allowance allows companies to offset up to £10,500 of employer NI liabilities.

However, it is not available to all businesses. A company must have multiple employees or directors to qualify.

If eligible, the £1,136 employer NI cost would be eliminated, increasing the tax savings of taking a £12,570 salary.

For comparison:

• Salary of £5,000 vs. £12,570

• Tax saved: £1,438 to £2,006 (depending on corporation tax rate).

What If I Am a Sole Director?

Sole directors without any other employees do not qualify for the Employment Allowance. This means the full £1,136 employer NI must be paid.

While this may suggest paying a £5,000 salary instead, the £12,570 salary still results in a greater corporation tax saving (at least £1,654 and up to £2,307 depending on corporation tax rate).

For sole directors, the recommended monthly salary remains £1,047.50 per month.

Key Tip:

There are two methods for calculating director NI:

1. Monthly Method: NI is due immediately from Month 1.

2. Annual Method: NI is only due once £5,000 is exceeded, meaning no NI until Month 5.

Both methods result in the same £1,136 employer NI cost, but the second method delays payments until later in the tax year.

Should Sole Directors Hire Additional Staff?

Changes in the 2024 Halloween Budget increased employer NI for sole directors from £479 to £1,136 (a rise of £657).

One way to potentially eliminate this cost is to hire a second employee, which would make the company eligible for Employment Allowance.

Many sole-director businesses rely on their spouse or partner for admin tasks. If formally employed, this could enable a claim for Employment Allowance, reducing the company’s NI burden.

However, hiring staff comes with legal obligations, so this must be considered carefully.

What Was the Optimal Salary in 2024/25?

Income tax and NI thresholds typically change each year, affecting the optimal director salary.

Since thresholds have remained the same, the optimal salary in 2024/25 was also £12,570.

How to Register Payroll with HMRC

If a director pays themselves a salary, they must report it to HMRC.

To do this, the business must register for PAYE and submit payroll information accordingly.

Optimising Salary and Dividends for 2025/26

Once a £12,570 salary is set, additional income should be taken as dividends due to lower tax rates:

• £500 of dividends are tax-free.

• Basic rate dividends (up to £50,270) are taxed at 8.75%.

For a director earning £50,270 through salary and dividends, their total tax liability is £3,255—an effective tax rate of 6.5%.

Final Thoughts

For most owner-managed businesses, paying a £12,570 salary remains the most tax-efficient option. The tax savings are slightly lower than previous years due to higher employer NI, but it still remains the best approach.

Directors should always assess their individual circumstances before making a final decision.