Optimum Limited Company Salary for 2025/26

Determining the Optimum Director’s Salary for 2025/26

Setting an effective remuneration strategy for limited company directors in 2025/26 is more nuanced than it might appear. This guide rigorously assesses the tax, national insurance, pension eligibility, and administrative considerations any director must understand to make an informed decision.

Key Variables When Setting Director Salary

Directors must account for several dynamic factors:

• Current income tax and National Insurance (NI) rates and thresholds
• Other personal income (e.g., investments, property rental)
• State Pension qualifying thresholds
• The impact of company profit levels on Corporation Tax (CT) savings

Paying a salary offers both individual and company benefits, not least the opportunity to reduce your company’s CT bill by treating salary as a deductible expense. Recent changes (April 2023 onwards) in Corporation Tax underscore the significance of these strategies.

"A meticulously structured director salary not only ensures regulatory compliance, but also optimizes both State Pension contributions and corporate tax savings."

Why Pay Yourself a Salary?

• Corporation Tax Relief: Salary is a legitimate business expense, directly reducing taxable profits.
• Pension Qualifying Year: Earning above the Lower Earnings Limit (LEL) secures a qualifying year towards your state pension.
• Administrative Simplicity: Lower salaries can mean less paperwork, especially if kept below PAYE thresholds.

While there is no statutory requirement for directors to take a salary, doing so is often strategically advantageous under current legislation—unless a director is above pensionable age or has substantial alternate incomes.

Always consult with a qualified accountant to ensure optimal, compliant arrangements for all directors and officers.

Tax Rates and National Insurance Thresholds 2025/26

The following thresholds are pivotal in shaping salary decisions:

• Personal Allowance: Most receive this tax-free (£12,570), typically evidenced by tax code 1257L.
• LEL: Only salaries above £6,500 count as a qualifying year towards your State Pension.
• Employees' NI Threshold: No employee NICs are due if salary is under £12,570.
• Employers' NI Threshold: The company pays NICs only on salary above £5,000—unless eligible for Employment Allowance (EA).

Salary Scenarios: Analysing the Options

When calculating the most tax-advantageous salary for 2025/26, consider both eligibility for the Employment Allowance and the company’s projected profits.

Context: Post-April 2023 Corporation Tax Bands

• Profits up to £50,000: CT at 19%
• £50,000–£250,000: CT at 26.5%
• Over £250,000: CT at 25%

Calculations here assume company profits are £50,000 or less.

1. £5,000 Salary

• No income tax due
• No employers’ or employees’ NI due
• Drawback: Below the LEL—does not contribute toward State Pension credits
• Corporation Tax saving: 19% of £5,000 = £950
• Minimal admin and zero PAYE deductions

2. £6,500 Salary

• No income tax due
• Employers’ NICs payable: 15% on £1,500 = £225
• No employee NICs due
• Qualifies for a State Pension year
• Corporation Tax saving: £1,235

3. £12,570 Salary (Single Director, No Employment Allowance)

• No income tax due
• Employers’ NICs: 13.8% of (£12,570 – £5,000) = £1,135.50
• Corporation Tax saving: 19% of £12,570 = £2,388
• Employers’ NICs are also CT-deductible, saving an additional £215.74
• Net company saving vs £6,500 salary: £190.75

This is the most tax-efficient option for single directors not eligible for Employment Allowance.

4. £12,570 Salary (With Employment Allowance)

• No income tax or employee NI due
• No employers’ NI due thanks to Employment Allowance
• CT saving: £2,388.30
• Net company benefit vs £6,500 salary: £1,110.55

Optimal for companies with two or more employees eligible for Employment Allowance.

Salary Comparison Table

Interpretation:

• The £12,570 salary is superior when Employment Allowance applies.
• For single-director companies not claiming EA, the incremental benefit still makes £12,570 preferable.

"Selecting the right salary ensures both corporate efficiency and personal tax effectiveness—ensuring directors are not over- or under- remunerated."

Frequently Asked Questions

Why not just take dividends?

While dividends are usually tax-advantaged compared to salary, they do not constitute qualifying earnings for State Pension or present the same CT deductions as salary.

What about umbrella company employees?

If you are paid through an umbrella company, standard income tax and NI processes apply. Tax deductions and NI will be routinely managed by the umbrella.

Historic Optimal Director Salaries

Note: Administrative simplicity in previous years sometimes pointed to slightly lower figures (e.g., £9,100 in 2023/24).

Always verify salary and dividend strategies with your qualified accountant in light of your specific circumstances.