• Swindon & Wiltshire Experts
• Wednesday July 2 2025
• Author Name: Michael Blaken

Company directors: what’s a tax-efficient salary to pay yourself? – Optimum Professional Services

If you’re a company director, now is a good time to review the balance of salary versus dividends that you pay yourself says Michael Blaken of Optimum Professional Services

How do you pay yourself an income as a company director? With a salary, or dividends or both?

The advice for company directors has generally been that the most tax efficient way to have an income is through paying a salary, with dividends on top.

But with recent changes in National Insurance, dividend allowances and the Employment Allowance, now is a good time to review the balance of salary versus dividends that you pay yourself.

Here is what’s changed for tax year 2025/26:

A combination of frozen allowances and increased Employer National Insurance means that achieving tax-efficient remuneration is now more challenging:

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

What are your options?

Your company’s structure and long-term goals will help you determine what’s best for you. Here are three alternatives to consider.

£5,000 Salary

This approach offers the simplest route with no Income Tax, National Insurance, or administrative burdens.

However, this salary falls below the Lower Earnings Limit, meaning you won’t earn a qualifying year for your state pension, so is not ideal for long-term planning.

On the upside, a £5,000 salary allows you to draw up to £45,270 in dividends while remaining within the basic rate tax band, assuming you have no other taxable income.

£6,500 Salary

Here, you will avoid Income Tax and Employee National Insurance, although there will be a small Employer NI bill of around £225.

Importantly, this salary level is high enough to count as a qualifying year for your state pension. Plus, you can take up to £43,770 in dividends and stay within the basic rate tax band, assuming you have no other taxable income.

For sole directors without other employees, who are therefore not making use of the Employment Allowance, this salary provides a reasonable mix of tax efficiency and future-proofing.

£12,570 Salary

This option makes full use of your Personal Allowance and is equal to the primary NI threshold, so you pay no Income Tax or Employee NI.

Your company will face a 15 per cent Employer NI charge on a salary over £5,000, but on the other hand, because both the salary and Employer NI are Corporation Tax deductible, you’ll create a saving (minimum 19 per cent) that typically outweighs the NI cost.

If your company is eligible for the Employment Allowance, this option becomes even more attractive.

If you are a sole director without other employees, you cannot claim the Employment Allowance. However, if your spouse, civil partner, or another family member genuinely works for your business, putting them on the payroll could unlock this allowance, leading to National Insurance savings. While a commercial salary would need to be paid, many small companies might find this a worthwhile consideration.

For small business owners focused on long-term wealth and retirement planning, making employer pension contributions is a popular way to extract further profits from their companies.

The benefits of this are:

• The payments are usually deductible for Corporation Tax purposes, reducing your company’s tax bill.
• The contributions aren’t subject to Income Tax or National Insurance for you.
• Subject to certain conditions, a company can contribute up to £60,000 per director per year to a pension fund. If you haven’t used your allowances from previous years, you might even be able to contribute more. It is important to speak with your financial adviser to review this.

Clearly, when it comes to directors’ remuneration, there is no one size fits all – you need to select the option that best suits your circumstances and your business.

Michael Blaken is accounts director at Optimum Professional Services