Optimum director remuneration package 2025/26

As a company director in the UK, structuring your remuneration in a tax-efficient way can help reduce your tax burden while staying compliant with HMRC rules. The 2025/26 tax year brings some key changes, including the lowering of the threshold for employer NIC contributions and frozen tax thresholds.  Deciding the correct remuneration package is a balancing act and these are the factors to consider in determining the split between salary and dividend:

• Levels of NIC for both employer and employee
• Level of salary to qualify for a NIC credit for the state pension
• Tax allowances for salary and dividends
• Tax relief for employee salaries
• How many people are on the payroll

There is no ‘one size fit all’ remuneration plan however in most cases, a low salary/high dividend strategy still works.  

What is the optimum director’s salary for 2025/26?

This will depend on whether the company qualifies for the Employment Allowance.  To be eligible, employers must have at least one employee or two directors on the payroll, and the directors must not have another company claiming the employment allowance. Sole director companies cannot claim the allowance.  The Employment allowance increased from £5,000 to £10,500 from April 2025.  

For sole directors with no employees, we recommend the salary should be at least £6,500 per annum to qualify for an NI credit for the state pension.  Although there would be no employee NIC, this level of salary would incur employers NIC of £225.  Corporation tax relief is available on salaries and employer NIC contributions.  

Although sole director companies cannot claim the Employer Allowance, we still recommend setting the salary at the tax-free personal allowance of £12,570. Although there will be a liability for employer NIC of £1,135.50 the corporation tax savings on the salary cost would be anywhere between £2,604 and £3,632.  When balanced against the employer NIC of £1,135.50, the corporation tax savings are greater than the employer NIC liability.  

Where there are at least 2 people on the payroll, our recommended director’s salary would be £12,570.  By setting the salary at the tax-free personal allowance, there would be no employee NIC.  The employer NIC of £1,135.50 would be covered by the Employment Allowance, so no employer NIC would be payable either.  

£500 Dividend Allowance

Once again in the 2025/26 tax year the first £500 of dividends are tax free.  Dividends above this amount suffer tax at 8.75% within the basic rate band, 33.75% at higher rate and 39.35% in the upper tax bracket.  One benefit of dividends is that they don’t attract a charge to national insurance.  Unlike salaries, dividends are not a tax-deductible expense in working out the corporation tax liability. Here is a comparison of income tax and dividend tax rates which illustrates the lower rates of dividend tax, particularly at basic rate:

Recommendations

The director salary should be set at £12,570 for the tax year 2025/26 irrespective of whether the company is eligible for the employment allowance.  At this level, the director will qualify for a NI pension credit for the year, and the company will make corporation tax savings on the salary and NIC liabilities.  

Additional income should then be taken as dividends.  

A director who earns £50,270 through a combination of salary and dividends will pay personal taxes of £3,255.  The effective rate of tax on this remuneration package is approximately 6.5%.  

A low salary/high dividend strategy may not always be the best overall strategy; therefore, it is always best to review your individual circumstances. Typical scenarios where you may want a higher salary could include:

• The company is in a loss-making situation, meaning dividends cannot be paid
• Mortgage purposes
• Death in service and permanent health insurance purposes
• Where you are involved in R & D activities
• Personal pension contribution levels (however company contributions continue to be very tax efficient)
• Your company is subject to corporation tax at 25% and you have high income needs

Please get in touch with our team should you wish to discuss the above in more detail.