Optimal Director Salary for 2025/26: Your Essential Guide

As proactive accountants, one of the most common questions we receive from business owners is: "What salary should I pay myself from April 2025?" With significant National Insurance changes coming into effect, it's essential to understand how these will impact your tax position and Cash Flow. In this guide, we break down the key thresholds and provide clear recommendations for optimising your director's remuneration.

Key Changes Coming in April 2025

Before diving into specific salary recommendations, let's recap the major changes affecting director remuneration from April 2025:

1. Employers' National Insurance increase - Rising to 15% (from the current 13.8%)

2. Employment Allowance increase - Doubling to £10,500 (from £5,000)

3. Secondary threshold reduction - Dramatically lowered from £9,100 to just £5,000

   
   

These changes create a complex tax landscape that requires careful navigation to maximise your take-home pay while ensuring your business remains tax-efficient.

Understanding the Three Critical National Insurance Thresholds

To make informed decisions about your salary, you need to understand three key thresholds:

1. Lower Earnings Limit (£6,500 annually)

This threshold determines whether you qualify for state pension contributions. As a director, you should pay yourself at least £6,500 annually (approximately £540 monthly) to ensure you continue building qualifying years toward your state pension.

This is particularly important given recent media coverage about "buying back" missing qualifying years. While we won't delve into that topic here, ensuring you meet this minimum threshold going forward is crucial for your long-term financial planning.

2. Primary Threshold (£12,570 annually)

This is the level at which employee National Insurance contributions begin. For the 2025/26 tax year, this threshold has been aligned with the personal tax-free allowance, which simplifies planning considerably.

In practical terms, this means you won't pay any income tax or employee National Insurance on earnings up to £12,570.

3. Secondary Threshold (£5,000 annually)

This is where the significant change occurs for 2025/26. The secondary threshold - where employers start paying National Insurance contributions on behalf of employees - has been reduced from about £9,700 to just £5,000.

This dramatic reduction means employers will pay 15% National Insurance on a much larger portion of employee salaries, potentially impacting your optimal salary strategy.

Your Optimal Director Salary for 2025/26

After analysing these changes and running various tax calculations, our recommendation for most directors is clear:

Set your annual salary at £12,570 (the personal allowance/primary threshold)

Here's why this makes sense for most business owners:

1. It's below the employee National Insurance threshold, meaning you pay no personal tax or NI

2. It maximises your tax-free personal allowance

3. The 15% employer's National Insurance is less than the minimum 19% corporation tax you would pay on the same amount if left in the business as profit

4. It comfortably exceeds the Lower Earnings Limit, ensuring you receive your state pension qualifying year

   
   

When This Recommendation Might Change

While £12,570 is optimal for most directors, your specific circumstances might warrant a different approach. Here are situations where you might need a personalised calculation:

If You're the Only Employee in Your Business

Solo directors cannot claim the Employment Allowance, which changes the calculation significantly. You'll need personalised advice in this scenario.

If Your Business Has Multiple Directors or Employees

For businesses with multiple directors or employees, the calculations become more complex as you need to consider:

• Whether you've fully utilised your Employment Allowance with other staff

• The corporation tax rate your business is paying (19-25%)

• Total salary costs across the business

  
  

If Your Business Is Part of a Group Structure

For group companies, the Employment Allowance can only apply to one company or be split across the group, adding another layer of complexity to your salary planning.

Beyond the £12,570 Threshold: Salary vs. Dividends

For amounts above £12,570, the decision between salary and dividends requires careful analysis:

• For earnings under £50,000: The difference between salary and dividends is often marginal, assuming you haven't used up your Employment Allowance

• For earnings over £50,000: Dividends typically become more tax-efficient due to higher rate income tax considerations

  
  

The calculation essentially compares:

Salary route: Income tax (20-40%) + Employee NI (8%) + Employer NI (15%)

Dividend route: Corporation tax (19-25%) + Dividend tax (8.75% basic rate, 33.75% higher rate)

Implications for Your Business's Financial Management

Optimising your director's salary isn't just about personal tax efficiency - it also impacts your business's:

• Profit & Loss statement: Different salary levels directly affect your reported profitability

• Cash Flow planning: The timing of salary vs. dividend payments can be structured to support business cash needs

• Management Accounts: Your remuneration strategy should be reflected accurately in monthly reporting

  
  

As a Finance Director or Finance Manager, integrating personal and business tax planning is essential for driving overall profit. This is where working with a proactive Accountant who understands both sides of the equation becomes invaluable.

Need Personalised Advice?

While this guide offers general recommendations, your optimal director salary should be based on your specific circumstances. The complexity of these calculations highlights why professional Bookkeeping and accounting support is essential for business owners.

If you would like access to our director salary decision table that outlines different scenarios based on company size and profit levels, simply email marketing@profitcashgrowth.com and we'll send it to you.

This article provides general guidance only and should not be considered as professional advice for your specific situation. Always consult with your Accountant before making decisions about your remuneration structure.

Need personalised advice on optimising your director's salary and overall tax strategy? Contact our team of proactive accountants at Profit Cash Growth today for a comprehensive review of your financial situation.