Director’s Salary and Dividend Strategy: Maximise Your Tax Savings in 2025/26

The Most Tax-Efficient Director’s Salary and Dividend Strategy for 2025/26 is crucial for directors and shareholders of small limited companies to maximize tax savings and streamline financial planning. With the release of the 2024 Autumn Budget, there’s plenty of fresh information to consider as you plan for the 2025/26 tax year.

Key Tax Rates and Allowances for Directors Salary in 2025/26

Starting on 6 April 2025, here’s a quick overview of the key numbers of directors and shareholders in England, Wales, and Northern Ireland should be aware of:?

• Personal Allowance: ￡12,570 (unchanged and frozen until April 2028).?

• Dividend Allowance: ￡500 (any dividends over this amount could be taxable).?

• Basic Rate Threshold: ￡50,270 (this hasn’t changed).?

• Additional Rate Threshold: ￡125,140 (this also stays the same).?

Note: These figures are different for Scottish taxpayers due to their unique tax rates.?

Why Combining Directors Salary and Dividends is a Smart Tax-Saving Strategy

For directors who also hold shares in their company, combining a modest salary with dividends is still one of the most effective ways to save on taxes. Here’s why this approach continues to work so well:?

• Tax-Deductible Salary: Paying yourself a salary reduces your company’s taxable profits. If family members help in the business, you can pay them a salary, which could also count as a deductible expense for your company.?

• No NICs on Dividends: Dividends don’t come with National Insurance Contributions (NICs), so you avoid the additional charges that typically apply to salaries.?

• Flexibility with Profits: Keeping some profits in the company gives you the option to access them later. This might even qualify for Business Asset Disposal Relief when you sell or close the business, though recent changes have made this slightly less appealing.?

• Contributions to Your State Pension: By paying yourself a salary at or above the NIC threshold, you ensure you’re building up contributions toward your state pension, securing a better future.?No NI Employment Allowance – A Tax-Efficient Approach

If you’re the sole employee in your business, you won’t qualify for the National Insurance Employment Allowance. In this case, it’s typically best to:

• Salary: Set your salary at ￡5,000 per year (or ￡416.66 per month).
• Dividends: Draw up to ￡45,270 while staying within the basic tax rate band.

Here’s how this works for Personal tax:?

• The first ￡7,570 of dividends (after the ￡5,000 salary) falls within your personal allowance.?
• The next ￡500 of your dividends falls under the dividend allowance, meaning it’s tax-free.?
• The remaining ￡37,200 is taxed at a rate of 8.75%, which amounts to a tax bill of ￡3,255.?

Option 2: Qualifying for the NI Employment Allowance

If your business employs another person, such as a family member, you might be eligible for the NI Employment Allowance. Starting in April 2025, this allowance increases to ￡10,500. This allows for a higher salary of up to ￡12,570 per year.

• Salary: ￡12,570 per year (or ￡1,047.50 per month).
• Dividends: Up to ￡37,700 to stay within the basic rate band.

While your tax on dividends remains the same as in Option 1, a higher salary provides additional corporation tax savings, thanks to its deductibility. With corporation tax rates now reaching up to 25%, this setup could save your company approximately ￡1,800 or more.?

Alternative Tax-Efficient Ways to Extract Profits

Looking to get creative with how you extract profits? Here are a few more strategies:?

• Spread Dividends Across Tax Years: This can help you make better use of allowances and lower tax bands.?

• Pension Contributions: Have your company contribute to your pension—it’s a tax-deductible expense for the business and not taxable for you.?

• End-of-Year Tax Planning: As the tax year ends, take a moment to review your financial situation. This will help you decide whether it’s better to take additional dividends now or hold off until the next tax year.?

Final Thoughts: Optimise Your Directors Salary and Dividend Strategy for 2025/26

If your business qualifies for the NI Employment Allowance, paying yourself a higher salary can be a smart way to boost your tax savings. However, if you’re the only director and don’t have other employees, the recent budget changes might feel like a bit of a setback. Even so, there are still plenty of opportunities to adjust your strategy and make the most of what’s available.?

Employing a family member could unlock further opportunities for efficient tax planning. For personalized advice tailored to your unique situation, get in touch with us at Accountancy. We’re here to help you make the most of your income in the 2025/26 tax year!?Visit our Website