How Much Should I Pay Myself as a Director in 2025/26? Your Guide to Tax-Efficient Remuneration

At BM & Co Accountants, we’re often asked: “What’s the most tax-efficient way to pay myself as a director?” It’s a simple question, but the answer depends on a variety of financial, legislative, and strategic considerations. With the 2024 Autumn Budget introducing significant changes that will take effect from April 2025, it’s now more important than ever for directors of limited companies to review how they draw income.

Understanding the implications of these changes will help you make more informed decisions, potentially saving you thousands of pounds annually. This guide aims to simplify the key updates, break down their practical implications, and provide a clear path forward tailored to the 2025/26 tax landscape.

In this guide, we’ll walk you through:

• The 2025/26 NI and tax changes
• Their impact on limited company directors
• Our recommended approach for paying yourself efficiently

Whether you’re a sole director of a small consultancy or managing a growing team, this guide provides essential insights to optimise your remuneration strategy.

1. What’s Changing in April 2025?

April 2025 marks a pivotal shift in how employer National Insurance contributions are calculated. These changes will affect businesses of all sizes but will be particularly relevant for owner-managed companies.

National Insurance Adjustments:

• Employer’s NI Threshold: Reduced from £9,100 to £5,000. This means companies will begin incurring NI costs on director salaries and employee wages once they exceed just £5,000, rather than the previously more generous £9,100 threshold.
• Employer’s NI Rate: Increased from 13.8% to 15%, representing a higher outlay for companies on wages paid above the threshold.

These two adjustments work in tandem to raise the overall cost of employing staff, including directors. While the changes are aimed at boosting national revenue, they do place additional pressure on SMEs and limited companies that rely on lean operating costs. For detailed information, you can refer to the official HMRC National Insurance changes.

2. What This Means for Directors

To illustrate the financial impact, let’s look at a common salary scenario:

If you currently pay yourself a salary of £12,570 (aligned with the personal allowance):

• Previous NI cost (2024/25): Approximately £478 annually
• New NI cost (2025/26): Approximately £1,135.50 annually
• Increase: Over £650 per year

That’s a substantial rise for many businesses operating with limited profit margins. Directors might be tempted to reduce their salaries to below the NI threshold to avoid the employer contribution entirely. However, as we’ll explain, this approach may not be the most tax-efficient.

3. Should You Still Pay £12,570?

Despite the increased cost of Employer’s NI, our general advice remains to maintain a salary of £12,570 per annum. This figure is strategically chosen to align with the personal allowance, meaning no Income Tax is due on this salary.

Why this salary level still makes sense:

• ✅ Corporation Tax Efficiency: When you pay a salary, including the associated Employer’s NI, this cost is fully deductible against profits before Corporation Tax. Although 15% NI is higher than before, it is still preferable to paying 19% or 25% Corporation Tax on those profits if they were instead left in the business. Check the latest Corporation Tax rates.
• ✅ Tax-Deductible Contributions: The Employer’s NI of £1,135.50 may seem steep, but it directly reduces your company’s Corporation Tax liability. In effect, this can soften the financial blow.
• ✅ Preserving State Pension Entitlement: Salaries above the Lower Earnings Limit (£6,500 for 2025/26) ensure that you qualify for National Insurance credits. This is essential for building up your entitlement to the State Pension and other contributory benefits. More information on State Pension qualification.
• ✅ No Employee NI: While the Primary Threshold for employees is £12,570, matching the personal allowance, no employee NI will be due on this salary. It hits the sweet spot of tax efficiency and compliance.

By strategically positioning your salary at this level, you gain the benefits of corporation tax reduction, pension qualification, and a tax-free personal income.

4. Dividends: The Second Piece of the Puzzle

After drawing your salary, the most tax-efficient way to increase your income is by paying dividends. Dividends are distributed from retained profits after Corporation Tax, and they do not attract National Insurance contributions.

This makes them particularly attractive for directors looking to extract more value from their business without significantly increasing the tax burden.

Key benefits of dividends:

• Not subject to National Insurance
• Taxed at lower rates than equivalent salary income
• Can be paid flexibly, depending on available profits

Dividend Tax Rates for 2025/26:

• First £500: Tax-free dividend allowance
• Basic Rate (8.75%): Applies to dividend income from £13,071 to £50,270
• Higher Rate (33.75%): £50,271 to £125,140
• Additional Rate (39.35%): Over £125,140

💡 Important: Dividends can only be paid from retained profits. If your business has not made enough profit, you are legally restricted from issuing dividends. Always ensure your accounts support the distributions. You can read more about dividend taxation.

Another advantage is that dividends can be timed more flexibly than salaries, allowing you to plan around your personal income tax thresholds and manage your overall exposure.

5. Summary: Recommended Director’s Salary Strategy for 2025/26

Below is a quick snapshot of the recommended salary structure for the upcoming tax year:

This structure provides an optimal balance between tax efficiency, statutory compliance, and long-term financial planning. It is simple to administer and can be adjusted annually based on legislative changes.

6. Other Considerations

There are several additional elements that directors should keep in mind when planning remuneration:

Employment Allowance:

• From April 2025, the allowance will rise to £10,500.
• This allows eligible businesses to offset this amount against their Employer’s NI bill.
• However, sole directors without any other employees or directors on the payroll do not qualify for this relief. If you employ staff or have more than one director, you may be eligible. You can review Employment Allowance rules.

National Living Wage (NLW) Updates:

• The NLW will increase to £12.21/hour for those aged 21 and over.
• Ensure you review staff wages to remain compliant.
• Although this doesn’t apply to directors who control their pay, it is relevant if you employ others. Check the latest National Living Wage rates.

Pension Contributions:

• Director pension contributions remain one of the most efficient tax planning tools.
• Company pension contributions are generally deductible for Corporation Tax purposes and not subject to NI.
• Consider incorporating pension planning into your overall remuneration strategy for long-term benefits. Read about pension tax relief.

7. Tax and NI Overview for 2025/26 (Quick Reference)

Understanding the bigger picture helps you make smarter financial decisions.

Income Tax Thresholds:

• Personal Allowance: £12,570 (0% rate)
• Basic Rate: 20% (£12,571 – £50,270)
• Higher Rate: 40% (£50,271 – £125,140)
• Additional Rate: 45% (Over £125,140)
• Tapering: For income over £100,000, the personal allowance reduces by £1 for every £2 of additional income.

National Insurance:

• Lower Earnings Limit (State Pension credits): £6,500
• Primary Threshold (employee threshold): £12,570
• Employee’s NI: 8% up to £50,270, then 2%
• Employer’s NI: 15% on earnings above £5,000

Corporation Tax Rates:

• Profits below £50,000: 19%
• Profits between £50,001 – £250,000: Marginal relief applies
• Profits over £250,000: 25%

8. Final Thoughts

The 2025/26 tax year introduces more complexity for directors looking to optimise their pay. However, the strategy of drawing a salary up to the personal allowance, combined with well-managed dividend distributions, remains one of the most effective approaches.

It’s worth reviewing your financial position regularly and adapting your remuneration in response to legislative updates and changes in your business circumstances.

At BM & Co Accountants, our role is not only to help you stay compliant but to empower you with practical insights that lead to better financial outcomes. If you’re uncertain about how these changes apply to your business, or you want to explore bespoke planning options such as pensions, profit extraction, or family tax planning, we invite you to get in touch.

Let’s build a strategy that works for your business — today and in the future.