What is the optimal directors salary for 25/26 tax year?

Determining the optimal salary for company directors in the 2025/26 tax year requires careful consideration of recent changes to National Insurance Contributions (NICs) and the implications for state benefits. Below, we explore three salary options, each with its own advantages and disadvantages.

There are 3 main options:

-          £5,000 – employer NIC threshold

-          £6,500 – Lower earnings limit

-          £12,570 – personal allowance

1. £5,000 per Year: No National Insurance, No Income Tax, No State Pension Benefit

• Pros: Setting an annual salary at £5,000 ensures that both Employers' and Employees' NICs are avoided, as this amount is below the Secondary Threshold (£5,000 for 2025/26). Additionally, no income tax is due since the salary is within the Personal Allowance.​ Therefore, no need to worry about monthly tax/NIC payments to HMRC each month.

• Cons: This salary is below the Lower Earnings Limit (£6,500 for 2025/26), meaning it does not qualify for National Insurance credits. Consequently, the director would not accrue entitlement towards the State Pension or other contributory benefits.

2. £6,500 per Year: No Income Tax, Employers' National Insurance, State Pension Benefit

• Pros: An annual salary of £6,500 meets the Lower Earnings Limit, thereby securing National Insurance credits and maintaining eligibility for the State Pension. No income tax or Employees' NICs are payable at this level.​ 

• Cons: Employers' NICs would be incurred on the amount above the Secondary Threshold (£5,000), resulting in a liability of approximately £225 per year. ​ 

3. £12,570 per Year: No Income Tax, Employers' National Insurance, State Pension Benefit

• Pros: This salary fully utilises the Personal Allowance, ensuring no income tax is due. It also exceeds the Lower Earnings Limit, securing National Insurance credits for the State Pension.

• Cons: Employers' NICs are payable on the amount above the Secondary Threshold, amounting to approximately £1,135.50 annually. While this increases the administrative burden due to monthly NIC payments, the salary is deductible as a business expense, reducing the company's Corporation Tax liability. For sole directors without additional employees, the Employment Allowance cannot be claimed to offset this NIC cost. ​ 

 Total Tax Cost (Corporation Tax + NI + Dividend Tax) for Different Profit Levels

Profit Before Salary	£5,000 Salary	£6,500 Salary	£12,570 Salary
£10,000	£1,824	£1,754	£1,365
£20,000	£3,649	£3,578	£3,188
£30,000	£5,474	£5,403	£5,012
£40,000	£7,299	£7,229	£6,837
£50,000	£11,074	£10,984	£10,605

Summary and Recommendations

For sole directors without other employees, the £12,570 salary option, despite incurring Employers' NICs, is often the most tax-efficient. The NICs paid are outweighed by the Corporation Tax savings, and it ensures eligibility for state benefits. ​

To mitigate Employers' NIC costs, consider hiring additional staff, which may qualify the company for the Employment Allowance, set to increase from £5,000 to £10,500 in April 2025. This allowance can offset the NIC liability, reducing the overall tax burden even more (see table below for companies claiming Employment Allowance). Companies that are already at this level, the £12,570 salary option is still optimal.

A lot of things factor in and each company has different circumstances. Also, given the complexities and potential changes in tax legislation, it is advisable to consult with a professional accountant to tailor the remuneration strategy to your specific situation and needs.

Total Tax Cost (Corporation Tax + NI + Dividend Tax) for Different Profit Levels (EA applied)

Profit Before Salary	£5,000 Salary	£6,500 Salary	£12,570 Salary
£10,000	£1,764	£1,414	£906
£20,000	£3,649	£2,990	£2,052
£30,000	£5,534	£4,565	£3,198
£40,000	£7,419	£6,140	£4,344
£50,000	£9,304	£7,715	£5,490