The most tax-efficient salary for directors in 2025/26 – What actually makes sense?

If you are a director of a limited company, you have likely been advised that the most tax-efficient way to pay yourself is through a low salary topped up with dividends.

That principle has not changed, but some of the numbers have.

With updates to National Insurance (NI) thresholds, dividend allowances and the Employment Allowance in 2025/26, it is worth reviewing how best to pay yourself this year.

What has changed for 2025/26?

A few key figures to note:

• Personal Allowance remains at £12,570 (frozen until 2028)
• Dividend allowance is still £500
• Employer’s National Insurance rate has risen to 15 per cent
• Secondary Threshold (where Employer NI starts) has dropped to £5,000
• Lower Earnings Limit (for pension purposes) has increased to £6,500
• Employment Allowance has doubled to £10,500

As allowances stay frozen and Employer NI increases, the margin for tax-efficient remuneration is tighter than in previous years.

What are your options?

Depending on your company setup and long-term priorities, there are three commonly used salary levels worth considering.

Option One – £5,000 Salary

This is the simplest route. No Income Tax, no NI, no admin headaches.

However, a salary of this level falls below the Lower Earnings Limit, so you won’t earn a qualifying year for your state pension. It is a lean approach, but not ideal if you are thinking long term.

With a salary of £5,000, you can pay yourself up to £45,270 in dividends and stay within the basic rate band, subject to any other taxable income you may receive from other sources.

Option Two – £6,500 Salary

This strikes a balance. There is no Income Tax or Employee NI but a small Employer NI bill of around £225 will arise.

A salary of this level is high enough to count as a qualifying year for the state pension and keeps you within the basic rate band if you take up to £43,770 in dividends, subject to any other taxable income you may receive from other sources.

If you are a sole director without any other employees and therefore cannot benefit from the Employment Allowance, this level of salary is a reasonable blend of tax efficiency and future-proofing but there is still a better solution.

Option Three – £12,570 Salary

This uses your full Personal Allowance and is equal to the Primary NI threshold so no Income Tax or Employee NI is due.

However, your company will pay Employer NI at 15 percent on the salary in excess of £5,000.

As Employer NI is due this may seem like an expensive option but both salary and Employer NI are deductible for Corporation Tax purposes and the saving (at a minimum of 19 per cent) often more than offsets the NI cost. If you qualify for the Employment Allowance then the position would be even better.

Given the corporation tax saving, and the fact that this level of salary will be high enough to count as a qualifying year for state pension purposes, this level of salary is likely to be the most tax-efficient option overall for a majority of directors.

Involving family members

If you are a sole director and do not have any other employees you cannot claim the Employment Allowance. However, if your spouse, civil partner, or another family member genuinely works in the business, adding them to payroll could unlock the allowance to obtain National Insurance savings.

A commercial salary would need to be paid but this may be a worthwhile consideration for many small companies.

Tax-Efficient Remuneration – Pension Contributions

As detailed above, a majority of small company owners extract their income via a small salary and dividends.

This type of remuneration structure is tax efficient as dividends are taxed at lower rates than salary and do not attract National Insurance. However, dividends do not have any impact on state pension eligibility.

In planning for long-term wealth accumulation and retirement planning, many small business owners extract further profits from their companies by making employer pension contributions.

Benefits of making employer pension contributions include:

• The payments are usually deductible for Corporation Tax purposes
• The contributions are not subject to Income Tax or NI
• Subject to conditions and exclusions, a company could contribute up to £60,000 per annum per director to a pension fund. If allowances from previous years have not been utilised, an even greater contribution could potentially be made

There’s no all-encompassing solution, but there is a smart option for most scenarios.

Whatever your preference, the key is making sure your remuneration mix supports your wider goals, whether that is saving tax, protecting your future, or keeping life simple.

Not sure which option is best for you? Speak to us today for expert guidance.

Stephanie Hurst