Company Director Salary Optimiser 2025/26 — Optimal Salary & Dividend Mix

Why Salary Strategy Changed for Directors in April 2025

For many years, the standard advice for owner-managed company directors was to take a salary equal to the personal allowance (£12,570 per year) and extract remaining profits as dividends. This strategy minimised both employee and employer National Insurance while using the full personal allowance tax-free. However, the Autumn Budget 2024 changed the calculation significantly from April 2025.

The employer NI rate rose from 13.8% to 15%, and the secondary threshold (the point at which employer NI begins) fell from £9,100 to £5,000 per year. This means that a salary of £12,570 now costs the company £12,570 × 15% employer NI on the excess above £5,000 — a cost of £1,135.50 in employer NI that was previously only £488.24. At the same time, the Employment Allowance increased to £10,500 — but crucially, sole directors with no other employees cannot claim it.

The Three Common Salary Strategies for 2025/26

Strategy 1: £12,570 — The Personal Allowance Salary

Taking a salary of £12,570 (the personal allowance) means no income tax on the salary and no employee NI below this level. However, from April 2025, the company pays employer NI of 15% on the salary above £5,000 — approximately £1,135/year. This salary is deductible from company profits, saving corporation tax at 19–25%. For directors who can claim the Employment Allowance (i.e. those with other employees), the employer NI is reduced or eliminated. For sole directors who cannot claim EA, the net benefit of the full personal allowance salary has reduced.

Strategy 2: £6,396 — The NI Lower Earnings Limit

A salary of £6,396 (the 2025/26 NI lower earnings limit) is above the secondary threshold and therefore incurs some employer NI (15% × £1,396 = £209.40), but it has an important advantage: the director earns a qualifying year for State Pension purposes. Below the lower earnings limit, no NI credits accrue for State Pension, so paying even a small salary above this threshold ensures your National Insurance record is maintained. For directors approaching retirement who may be short of qualifying NI years, this can be worth far more than the small NI cost.

Strategy 3: £5,000 — The Secondary Threshold Salary

A salary exactly at the new £5,000 secondary threshold means no employer NI at all — the threshold is the point at which employer NI starts, so at exactly this amount no NI applies. However, a salary of £5,000 is below the NI lower earnings limit, meaning no NI credits accrue. This strategy avoids all NI costs but at the expense of the State Pension record. It is worth considering if your State Pension is already fully funded (35 qualifying years) or if you are younger and have many years of working left.

Dividends — How They Complement Your Salary

Once you have extracted your salary from the company and paid corporation tax on the remaining profit, dividends are the most tax-efficient way to extract the after-tax profits. Dividends are not subject to National Insurance. The dividend tax rates for 2025/26 are:

• First £500: 0% (dividend allowance — dramatically reduced from £5,000 in 2017)
• Basic rate (£500 – £50,270 total income): 8.75%
• Higher rate (£50,270 – £125,140): 33.75%
• Additional rate (above £125,140): 39.35%

Dividends are paid from post-corporation-tax profits. A £1 of company profit results in less than £1 of dividend (once CT is paid), so the effective tax rate on extracting money through dividends is: corporation tax + dividend tax on the remaining amount. The combined rate for a basic rate taxpayer with a 25% CT company is approximately 40.6% — still better than PAYE for equivalent amounts.

The Impact of the Employment Allowance

The Employment Allowance — increased from £5,000 to £10,500 from April 2025 — allows eligible employers to reduce their employer NI bill. However, sole directors with no other employees cannot claim it. If your company employs even one other person (such as a partner or family member, provided they have genuine duties), the company may become eligible for the Employment Allowance, completely changing the salary calculation. The allowance can offset up to £10,500 of employer NI, effectively making a salary of up to £75,000 free of employer NI for eligible businesses.