Tax Efficient Salary for Directors in 2025-26
Paula Veysey-Smith • 28 April 2025
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.
HMRC are starting to send out letters to sole traders and landlords in the initial steps towards Making Tax Digital for Income Tax. If you receive one of these letters do not panic, help is at hand. So let’s answer your most asked questions about Making Tax Digital. What is Making Tax Digital for Income Tax? Making Tax Digital for Income Tax (MTD for ITSA) is a UK government initiative aimed at modernising the tax system. It will require individuals and businesses to keep digital records and submit tax information to HMRC using compatible software. It is part of a broader initiative to digitalise tax returns and follows on from the changes already implemented for VAT reporting. Will Making Tax Digital affect me? MTD for ITSA will affect individuals who: Are self-employed (e.g. sole traders) and/or landlords (earning income from property). Have a total income over £50,000 per year (combined from self-employment and property). Are currently required to complete a Self-Assessment tax return. From April 2026 , MTD for ITSA will be mandatory for those earning over £50,000. From April 2027 , this threshold will reduce to £30,000. What will I have to do if my earnings are over the threshold? You will need to keep digital records for income and expenses which will mean using MTD compatible software. This will be a major change for those of you still keeping paper records. Instead of submitting an annual self-assessment return you will need to submit quarterly updates 4 times a year to HMRC. At the end of the tax year an End of Period Statement (EPOS) and a Final Declaration will need to be submitted which essentially replaces the current Self-assessment return. All of these will be required digitally, paper records and manual calculations will no longer be accepted. This means that instead of 1 annual return you will need to make 6 submissions! So what software do I need to use to keep digital records? Acceptable software include: QuickBooks Xero FreeAgent Sage or, HMRC-recognised spreadsheet tools with bridging software ( not highly recommended ) No more shoeboxes of receipts or manual books — everything must be digitally recorded. When will I need to register for MTD? You’ll need to sign up for MTD for ITSA before April 2026 . This is a deadline and not a target, signing up early is always advisable. HMRC will provide a service for you to do this but having the guiding hand of an accountant will make this a much easier task.
What are these jumbles of letters and numbers? When you start a new job, receive a pension, or change employment, you’ll likely notice a tax code on your payslip. Although, to many, this code looks like a random combination of letters and numbers it is actually the crucial piece of information that determines how much tax is deducted from your income. Understanding your tax code will empower you to check that you’re paying the correct amount of tax and, if necessary, correct the code with HMRC. What is a Tax Code? A tax code is used by your employer or pension provider to calculate how much income tax to deduct from your pay or pension. It’s based on your Personal Allowance (the amount you can earn tax-free each year) and any other factors that affect your tax situation, such as additional income or benefits. For the 2024/25 tax year, the standard Personal Allowance is £12,570 and will remain at this level for the 2025/6 tax year. This means most people can earn up to this amount without paying income tax. Common UK Tax Codes and Their Meanings Common codes can be broken down into three main categories: Standard Tax Codes 1257L: This is the most common tax code for people with one job or pension. It reflects the standard Personal Allowance of £12,570. BR: Stands for Basic Rate (20%). This code is used when all your income from this employment or pension is taxed at the basic rate, usually because you have more than one job or pension and the Personal Allowance has already been used up. D0: This means all your income is taxed at the higher rate (40%). D1: This code applies when all your income is taxed at the additional rate (45%). 0T: Used when your Personal Allowance has been used up, and all your income is taxable. Although similar to BR this code applies to all tax rates (20%, 40% & 45%). Emergency Tax Codes The term ‘Emergency Tax Code’ is often misunderstood. This code is most often used when HMRC does not have the information to calculate the correct tax code for an individual and should be corrected when the information does become available. Usually the code 1257L W1/ M1 is used which means that the Personal Allowance is being applied. The main difference is that tax is calculated on a weekly (W1) or monthly (M1) basis rather than cumulatively. You would most usually see this if you’ve started a new job and your previous tax details are not yet available 0T W1/M1 is another emergency tax code but this means that no Personal Allowance is being applied, leading to higher tax deductions. Worldwide and Non-Resident Tax Codes NT: No tax is deducted from your income. This is usually for non-UK residents or people with special tax arrangements. K: This code is used when untaxed income (e.g., state benefits or company benefits) exceeds your Personal Allowance, meaning additional tax is due. If your tax code begins with an S then it is a Scottish code and similarly if it is a Welsh code it will begin with a C . Other Special Tax Codes There are a number of letters that may also be applied to a tax code: T: Used when HMRC needs to review your tax code (e.g., for complex tax situations or multiple income sources). Y: For people born before 6 April 1938 who qualify for a higher Personal Allowance. L: Indicates entitlement to the basic Personal Allowance. M: Given to someone receiving the Marriage Allowance from their spouse. N: Given to someone transferring part of their Personal Allowance to their spouse. How to Check and Change Your Tax Code Your tax code will appear on your payslip, P60, or P45. If you think your tax code is incorrect, you can: Check Online: Log into your personal tax account on the HMRC website . Contact HMRC: Call HMRC to request a review or correction. Seek Professional Advice: If you’re unsure, a tax advisor can help you navigate your tax situation. Why Understanding Your Tax Code Matters Getting your tax code right is essential to ensure you’re not overpaying or underpaying tax. An incorrect tax code could lead to an unexpected tax bill or a delay in receiving a refund. By understanding your tax code, you can take control of your finances and avoid unnecessary stress. Need Help with Your Tax Code or Finances? Tax codes can be confusing, especially if you have multiple income sources or complex financial arrangements. At MPower Accounting, we’re here to help! Our team of experts can guide you through your tax obligations, ensure your tax code is correct, and help you maximise your income. Contact MPower Accounting today for personalised advice and support. Let us take the stress out of tax so you can focus on what matters most. Sources: HMRC (HM Revenue & Customs): Tax Codes Overview: HMRC Tax Codes Guide Personal Allowance and Tax Codes: HMRC Personal Allowance Emergency Tax Codes: HMRC Emergency Tax Marriage Allowance: HMRC Marriage Allowance K Tax Code: HMRC K Code Non-Resident and NT Code: HMRC Non-Resident Tax Scottish Government: Scottish Tax Codes and Rates: Scottish Income Tax S Prefix Tax Codes: Scottish Tax Codes Welsh Government: Welsh Tax Codes and Rates: Welsh Income Tax C Prefix Tax Codes: Welsh Tax Codes General Tax Information: Understanding Tax Codes: Money Advice Service - Tax Codes Tax Codes for Multiple Jobs: HMRC Multiple Jobs
The Bank of England has halved its growth forecast for 2025 as it reduced interest rates to their lowest level in over 18 months. The UK economy is now expected to grow by 0.75% in 2025, down from the previous estimate of 1.5%. Despite this downgrade, Bank of England Governor Andrew Bailey expects a "pick-up" in growth, though he emphasised the need for gradual and careful rate cuts due to economic uncertainties. The latest interest rate cut—from 4.75% to 4.5%—signals the Bank’s continued efforts to stimulate economic activity while managing inflation risks. What This Means for Small Businesses in the UK For small businesses, the interest rate cut and lower growth forecast have both benefits and challenges: Positive Impacts Lower Borrowing Costs: Businesses relying on loans, credit, or overdrafts may see slightly reduced repayment costs. This could help with cash flow and investment decisions. Potential Increase in Consumer Spending: Lower interest rates might encourage consumer borrowing and spending, benefiting sectors like retail, hospitality, and services. Reduced Mortgage Payments for Business Owners: Many small business owners with tracker or variable-rate mortgages could see a slight drop in their monthly payments, potentially freeing up more funds. Negative Impacts Slow Economic Growth (0.75% instead of 1.5%): Businesses might experience reduced demand and slower revenue growth due to weaker economic conditions. Rising Employment Costs from April 2025: The increase in employers' National Insurance contributions could make hiring more expensive, discouraging expansion and investment. Inflation Expected to Rise (3.7%): Higher energy and water bills will increase business operating costs, especially for energy-intensive industries. Lower Confidence & Uncertainty: Businesses may hesitate to invest or expand due to economic instability. The Mortgage Impact: Who Benefits? Tracker Mortgage Holders: Around 629,000 homeowners with tracker mortgages will see an estimated £29 reduction in monthly payments. Standard Variable Rate (SVR) Holders: Nearly 700,000 people on SVRs must wait to see if their lenders adjust rates accordingly. Fixed-Rate Mortgage Holders: No immediate change, but they may find better deals when renewing. Savers: Those relying on savings for income, such as retirees, may see lower returns on savings accounts. What Next? The Government’s Response Prime Minister Sir Keir Starmer emphasised the need to "turn the economy around" with a focus on infrastructure, planning, and nuclear energy. However, businesses remain concerned about higher employment costs and stagnant growth. Chancellor Rachel Reeves has introduced measures to stimulate the economy, but critics argue that the employer National Insurance hike will increase costs for businesses, making it harder to invest or hire staff. Shadow Chancellor Mel Stride warned that while rate cuts are good news for families and businesses, the government’s "disastrous Budget" could limit further rate cuts this year. Take Control of Your Finances with MPower Accounting With rising business costs, inflation concerns, and economic uncertainty, small businesses need strategic financial planning now more than ever. Mpower Accounting specialises in helping small businesses across London, Kent, and Sussex navigate financial challenges. Whether you need help managing rising payroll costs, improving cash flow, or planning for tax efficiency, Mpower Accounting has you covered. How MPower Accounting Can Help Your Business Optimise payroll & plan for the National Insurance hike Improve cash flow management to navigate economic shifts Access expert financial advice to make smarter business decisions Prepare for tax changes & ensure compliance Book a consultation today and get expert support tailored to your business! Stay ahead of economic changes with the right accounting partner. Photo by Tim Mossholder on Unsplash
Self-assessment tax, between navigating tax codes, understanding what to include, allowable expenses, and the deadlines, it’s easy to feel like you’re spinning in circles with no clear direction, a bit like being on a Magic Roundabout! Well with that in mind I’ll hand over to some much loved characters to explain more... On a sunny day in Tax Meadows, Dougal the dog, Florence, Zebedee, and the gang gathered around to talk about a magical thing called Self-Assessment . Boing went Zebedee and said, "Self-Assessment is telling the Tax Gardeners at HMRC about how many seeds you’ve made from the lovely flowers in our magic meadow. If you’ve made more seeds that you planted you have to pay some of them back to them to keep the meadow looking lovely!” Young Florence, who didn’t know much about the Tax Gardeners also asked, "and who has to tell them, don’t they know already?" Zebedee nodded wisely. “If you have a job, your employer will tell them but if you’re like Ermintrude the cow, selling flowers at the market, or Brian the snail, renting out your shell as a holiday home, you need to do tell them about all the income you earn!” Dougal wagged his tail, “When do we have to send it to the Tax Gardeners?” Boing went Zebedee, as he couldn’t contain his excitement at being the Tax Gardeners expert. “You must file by 31st January and pay the seeds you owe them or they might start blowing dandelion fluff everywhere and we don’t want that! “Yes, don’t be late," warned Ermintrude, "or they'll send Soldier Sam with a nasty letter!" Zebedee looked put out that she had butted in and his spring, for once, didn’t boing! Ermintrude continued, pleased to have something better to do than chew the flower in her mouth! “First, there’s the arrival of a £100 fine —a little like an unexpected boing from Zebedee, but far less delightful. This fine appears whether or not you owe any tax. If you dawdle for three months, you’ll meet another twisty challenge. Now it’s £10 per day , up to a maximum of £900, like being chased, if rather slowly, around the roundabout endlessly by Brian. After six months, an extra 5% of tax owed (or £300, whichever is greater) is added to the dandelion mix.” The sun had started to set, Florence smiled and said, "So, Self-Assessment isn’t scary—it’s just about telling the Tax Gardeners the truth and helping the meadow thrive!" "Exactly!" Zebedee laughed. “Be a Brian, start off early, take it slow but steady and you’ll get there in plenty of time. Boing when Zebedee one last time, “Time for bed and tomorrow we’ll work on keeping our meadow blooming!” I hope you enjoyed our visit to the Magic Roundabout, a fun look at Self-assessment tax. If you haven’t been a Brian please do contact us now and we can wave our magic wand to make your self assessment return go away!
