Tax Efficient Salary for Directors in 2025-26
Key changes in Employer National Insurance (NI) rates and thresholds for the 2025-26 year have meant advice on the tax efficient salary for Directors has significant altered.
The changes that took effect from 6th April 2025 are:
- Employer's NI Rate Increase from 13.8% to 15%
- Employer's NI Threshold Reduction from £9,100 to £5,000 per annum
- Employment Allowance Increase from £5,000 to £10,500 per company
For the 2025-26 tax year, determining the most tax-efficient salary for Company Directors depends on a number of factors with your company's eligibility for the Employment Allowance being the most significant.
For Single Directors where the Employment Allowance can’t be applied the most tax efficient salary is now set at £12,570 pa (£1,047.50 pm). Although this salary will incur employer’s NI of £1,135.50 pa, the association corporation tax savings will outweigh this cost. Please see below:
Salary: £12,570
Employer NI: £1,135.50
Total costs allowable for Corporation Tax: £13,705.50
Corporation Tax relief at 19% of £13,705.50 = £2,604.05 less £1,135.50 NI = £1,468.55 represents the savings in CT after the NI cost.
The other salary option is £6,500 per annum which still qualifies for the state pension but will attract Employers NI contributions of £225 on the £1 500 above the £5 000 threshold. The solution above is better as the savings are greater but we would recommend this option if the company wasn’t performing well. The workings are below:
Salary: £6,500
Employer NI: £225
Total costs allowable for Corporation Tax: £6,725
Corporation Tax relief at 19% of £6,725 = £1,277.50 less £225 NI giving tax credit of £1,052.75.
The benefits are only increased if your company pays tax at 25%.
A final option is to only pay £5 000 per year to avoid any HMRC payments but this does mean there are no contributions at all towards pension; although it is the simplest of the three to administer we do not recommend this option due to the lack of qualification for pension contributions.
Employment Allowance Eligibility
Most companies with two or more employees or directors earning above the Secondary Threshold (£5,000) qualify for the Employment Allowance, which can offset up to £10,500 of Employer's NI contributions.
This will also make the £12,570 salary option more attractive, as the Employer's NI can be fully covered by the allowance.
Other company and personal circumstances can impact these calculations so it is always best to seek the advice of a professional. At MPower Accounting we have a dedicated payroll bureau to give our clients the best advice on their personal situation.
Please
contact us if you need further assistance in understanding what is the best salary for you.
