Director's Salary Guide for 2025/26:

As a payroll expert and founder of Intelligent Payroll Limited, I’ve seen many directors grappling with the question of how much salary to take from their limited company. 

The recent changes announced in the Chancellor’s October 2024 budget have made this decision even more crucial for the 2025/26 tax year. Let me break down the key considerations and options to help you make an informed decision.

Understanding the Changes for 2025/26

The most significant change affecting director’s salaries is the reduction in the Employer’s National Insurance threshold from £9,100 to £5,000. This change, combined with other factors, means we need to carefully consider the optimal salary level for directors.

Key Thresholds for 2025/26

Before diving into recommendations, let’s understand the important thresholds:

• Personal Allowance: Remains at £12,570
• Employer’s NI Threshold: Reduced to £5,000
• Employee’s NI Threshold: Stays at £12,570
• Lower Earnings Limit: £6,500 (important for State Pension qualification)
• Dividend Allowance: Remains at £500

Options for Director’s Salaries

For Sole Directors

If you’re the only director in your company, you have several options to consider:

1. £5,000 Annual Salary (£416.66 monthly)
   • Matches the new Employer’s NI threshold
   • No Employer’s NI contributions required
   • Below Lower Earnings Limit – doesn’t count toward State Pension
   • Maximises funds available for dividends
   • Corporation tax relief available on salary
2. £6,500 Annual Salary (£541.66 monthly)
   • Meets Lower Earnings Limit
   • Qualifies for State Pension credits
   • Small Employer’s NI liability (£225 annually)
   • Corporation tax relief outweighs NI cost
3. £12,570 Annual Salary (£1,047.50 monthly)
   • Matches Personal Allowance
   • No income tax liability
   • Higher Employer’s NI cost (£1,135.50 annually)
   • Maximum corporation tax relief
   • Qualifies for State Pension credits

For Companies with Multiple Directors

If your company has two or more directors, the optimal strategy is different:

• Recommended salary: £12,570 annually (£1,047.50 monthly)
• Eligible for increased Employment Allowance (£10,500)
• No Employee’s NI contributions
• Employer’s NI covered by Employment Allowance
• Maximum corporation tax relief
• Qualifies for State Pension credits

Making Your Decision

When choosing your salary level, consider:

1. Cash Flow: Higher salaries impact monthly cash flow but provide more corporation tax relief
2. State Pension: Ensure you’re making qualifying contributions if this is important to you
3. Employment Allowance Eligibility: Could adding another director be beneficial?
4. Other Income Sources: Factor in any additional income that might affect your tax position
5. Dividend Strategy: Balance salary with dividend payments for optimal tax efficiency

What About Dividends?

Remember that dividends remain a tax-efficient way to extract additional profits from your company. With the dividend allowance at £500, careful planning of your salary and dividend mix is essential.

Next Steps

The right salary structure depends on your specific circumstances. Consider factors like:

• Whether you’re a sole director or have other directors/employees
• Your company’s cash flow requirements
• Your personal tax position
• State Pension qualification needs
• Overall remuneration strategy

Professional Support

While this guide provides an overview, every situation is unique, in most cases, your accountant is best placed to assist with your specific scenario.

At Intelligent Payroll Limited, we’re here to help you navigate these decisions with expert guidance tailored to your specific circumstances. 

We can help ensure your payroll structure is both compliant and tax-efficient.