As we approach the start of the new tax year on 6 April 2025, it’s the perfect time to decide how much salary to draw as a company director for the year ending 5 April 2026. With the changes announced in the Autumn Budget 2024, your choice can significantly impact your tax position and overall financial planning.

What’s Changed in the Autumn Budget?

– Employer National Insurance (NI) threshold has dropped from £9,100 to £5,000.

– Employer NI rate has increased from 13.8% to 15%.

– Employment Allowance has risen from £5,000 to £10,500.

These changes have reshaped the tax landscape for limited company directors. With this in mind, a salary of £12,570 now offers the most tax-efficient option for many.

Salary Options Compared – Why £12,570 Makes Sense

£12,570 Annual Salary (£1,047.50 per month)

– Qualifies for National Insurance credits, helping you build your State Pension and other benefit entitlements.

– While Employer NI is payable, it’s fully deductible for Corporation Tax, reducing your company’s tax bill.

– Maximises tax efficiency when paired with dividend income, allowing you to stay under the higher-rate tax band.

– Adds a valuable expense to the company’s books, lowering taxable profits.

– Estimated annual tax benefit compared to taking no salary: up to £888.

£6,396 Annual Salary (minimum to qualify for NICs)

– Meets the minimum threshold for NI credits, protecting your entitlement to state benefits.

– Minimal Employer NI costs, but less Corporation Tax relief.

– Not as effective when balancing with dividends.

– Estimated tax benefit over no salary: up to £581.

£9,096 Annual Salary (£758/month)

– Once a popular choice, now less attractive due to the lower NI threshold and higher Employer NI rate.

– Reduced Corporation Tax savings compared to the £12,570 salary.

– Estimated tax benefit over no salary: up to £344.

No Salary

– Year does not count for National Insurance unless you make a voluntary Class 3 NI contribution (currently around £907.40).

– No Corporation Tax relief on salary, meaning higher company profits and tax.

– Dividends become your only income, potentially pushing you into higher tax brackets.

– Could harm long-term access to the State Pension and benefits.

Understanding the Employment Allowance

The Employment Allowance helps businesses by reducing Employer NI contributions – and the limit is now £10,500 per year.

For Companies with Employees:

– The first £10,500 of Employer NI contributions are covered by the allowance.

– Paying salaries above the £5,000 threshold becomes more tax-efficient, as the higher 15% NI rate is offset by the allowance.

– Businesses with multiple employees or directors can benefit fully, reducing payroll costs and enhancing tax efficiency.

For Sole Directors:

– The Employment Allowance generally does not apply if you’re the only employee/director on payroll.

– This makes the £12,570 salary even more strategic, as it still provides optimal tax relief and NICs, even without the allowance.

– Adding another employee or director could unlock the allowance, providing additional tax planning opportunities.

Final Thoughts

Setting your salary at £12,570 for the 2025/26 tax year can help you:
– Maintain your NIC record.
– Reduce your Corporation Tax bill.
– Balance your salary and dividends more effectively.

If your business has multiple team members, be sure to make full use of the increased Employment Allowance for even greater savings.

Want to make the most tax-efficient decision for your situation? Speak to your accountant for personalised advice tailored to your company’s setup.