With the latest round of reforms affecting National Insurance contributions, many directors of limited companies are re-evaluating how to structure their PAYE salary to remain tax-efficient, ensure compliance, and retain access to vital state benefits. If you’re a director looking to optimise your income while keeping your company’s tax exposure to a minimum, it’s essential to understand the new thresholds, allowances, and how they interact.
Let’s break down the latest updates and what they mean for you as a limited company director in 2025.
The Key Thresholds for Directors – What You Need to Know
In 2025, the key figures that dictate how PAYE should be handled for directors have been updated – and they matter more than ever:
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- Personal Allowance: £12,570 – The amount you can earn tax-free for income tax purposes.
- Lower Earnings Limit (LEL): £6,500 – The minimum amount you need to earn through payroll to secure a qualifying year for state pension and eligibility for certain state benefits.
- Employer NI Threshold: £5,000 – The point at which employer National Insurance contributions now begin.
- Employment Allowance: £10,500 – The offset available for qualifying companies with multiple employees or directors.
So what does this mean in practical terms?
If you’re taking a director’s salary through PAYE and are looking to remain efficient with your tax and NI position, aiming for a salary between £6,500 and £12,570 remains the sweet spot. Within this range:
- No employee NI contributions are due.
- You secure a qualifying year towards your state pension.
- Income tax is not applicable (assuming your full personal allowance is available).
- However, employer NI kicks in from £5,000, unless you qualify for Employment Allowance.
Employment Allowance – Who Qualifies in 2025?
A crucial update in 2025 is the expanded eligibility for Employment Allowance. Previously more restrictive, the government has opened access to more small companies. Here’s what you need to qualify:
- You must have at least two employees or directors on your payroll, each earning above the £5,000 employer NI threshold.
- Your company must be a qualifying business, i.e., not operating within sectors or under conditions excluded from the scheme (for example, companies with de minimis state aid limits).
If eligible, the £10,500 Employment Allowance can offset your employer’s NI liability, effectively allowing you to process up to the full £12,570 salary without incurring additional NI costs.
This makes it financially sound for many directors to take the maximum tax-free salary under PAYE, rather than lower amounts that don’t fully utilise their allowance or benefit rights.
The Solo Director Scenario – Mind the Gap
One important caveat applies to sole directors with no other employees on the payroll. In these cases:
- You are not eligible for Employment Allowance.
- Employer NI contributions at 15% will apply on any salary amount exceeding £5,000.
Here lies the dilemma – if you pay yourself less than £6,500, you miss out on a qualifying year for your state pension. If you pay above £6,500 to secure that year, you must also budget for the employer NI liability.
While this cost is not excessive, it is something to factor in. For example, if you paid yourself £9,000 through PAYE, you’d incur roughly £600 in employer NI – a figure that may still be worthwhile given the long-term benefits of building state pension entitlement.
You can pay the employer NI via your Government Gateway account or using the online portal provided by HMRC:
https://www.gov.uk/pay-paye-tax
Dividend Planning and Corporation Tax – Other Considerations
While this article focuses on PAYE, it’s worth remembering that dividends remain a popular method of drawing income from a limited company. Typically taxed more favourably, dividends are paid from post-corporation-tax profits, so it’s wise to weigh up how PAYE salary and dividend strategies interact.
Moreover, changes to corporation tax rates and thresholds may also influence your decision. The right mix of salary and dividends can help reduce both personal tax and company tax bills.
Also, your tax code may vary depending on your personal situation – multiple income sources, benefits in kind, or underpaid taxes from previous years can all affect what’s deducted via PAYE.
That’s why speaking to an accountant or tax adviser is so important. A tailored review of your finances can ensure:
- You don’t overpay tax unnecessarily.
- Your pension and benefit entitlements are protected.
- Your business stays compliant.
Need Support with Your Director Payroll Strategy?
Our specialist team is here to guide you through the intricacies of PAYE, National Insurance, and optimal remuneration strategies. Whether you’re a sole director or running a larger team, we’ll help you stay efficient, compliant, and aligned with your financial goals.
Speak to one of our tax specialists today to craft a director pay plan that works for your unique situation.