Do you pay yourself a salary from your business?
For the majority of directors who are shareholders in their own company, taking a nominal salary and extracting the balance as dividends continues to be the most tax efficient method of extracting their limited company profits.
Following the recent Labour Budget changes to national insurance thresholds and rates for 2025/26, we have reviewed the optimum tax efficient remuneration strategy for directors’ salaries from April 2025.
The most tax efficient salary for sole directors (a company with only one director), is complicated as the Employment Allowance cannot be claimed if you are the only person in the business.
From April 2025, the Secondary Threshold (the point at which you start making national insurance contributions as an employer) reduces from £9,100 to £5,000 for 2025/26. Many sole Director salaries currently are set at £9,100 (£758.33 per month) to ensure no unnecessary Employers National Insurance is incurred. If they remain at this level from April 2025, Employers National Insurance will be incurred.
However, if the salary is reduced to the £5,000 Secondary Threshold for 2025/26, the salary is below the Lower Earnings Limit (set at £6,500 for 2025/26) and therefore it won’t earn national insurance credits towards your state pension.
The optimum strategy is to set salaries at £12,570. At this level, it is above the Lower Earnings Limit so it will earn national insurance credits for state contributions and there will be no income tax incurred on the salary as the tax-free personal allowance is £12,570 for 2025/26.
A sole director taking a salary at this level will incur employer’s National Insurance on the wages, but the salary is offset against the company profits, which will reduce the company corporation tax liability. The reduction in the corporation tax is more than the Employers National Insurance that will be paid, and therefore overall, more tax efficient.
Current salaries for companies with two or more directors can remain at £12,570 and the Employers National Insurance contributions will be offset against the Employment Allowance Claim, which is available for companies with more than one director.
Below is a table of the overall Net Tax Savings to illustrate the above showing that the optimum net tax saving for sole directors is a salary of £12,570 saving overall tax of £1,468.55.
| Sole Director Secondary Threshold | Sole Director Lower Earnings Limit | Sole Director Primary Threshold | 2+ Directors Primary Threshold | |
|---|---|---|---|---|
| Annual salary amount | £5,000 | £6,500 | £12,570 | £12,570 |
| Can claim Employment Allowance | No | No | No | Yes |
| Will need to pay Employer NI | No | Yes | Yes | No |
| Will need to pay NI as an employee | No | No | No | No |
| Will need to pay income tax | No | No | No | No |
| Will earn NI credits | No | Yes | Yes | Yes |
| Total NI to pay | £0.00 | £225.00 | £1,1350 | £0.00 |
| Corporation Tax Relief based on CT rate of 19% | £950.00 | £1,277.75 | £2,604.05 | £4,776.60 |
| Net tax savings | £950.00 | £1,052.75 | £1,468.55 | £4,776.60 |
Who should seek additional advice?
There are some circumstances where the strategy above may not be right for you. If any of the following apply, we would recommend getting in touch:
- You are a director but have income from another source outside of your limited company (i.e. rental income).
- How much tax you pay or save across the combination of your company and you personally is more important than what you personally take home in cash, and you can afford to sacrifice personal take-home pay for the benefit of the company tax position.
- You are already drawing more cash than you need to fund your lifestyle.
- You are planning on drawing between £100,000 and £125,000 of income from your company.
- You have income of over £50,000 from other sources.