Maximising Tax savings by having a tax efficient salary and dividends strategy :
It is more crucial than ever to have a clear plan in place from April 25, due to the announcements from the Autumn 2024 budget, which has seen some increased costs for employers.
A directors salary remains a tax efficient way to extract income from a limited company for most directors, accompanied by dividends.
Whether a directors salary is the right choice, and at what level, will depend on your individual circumstances, it is therefore highly recommended to speak to an accountant or tax advisor to ensure you are set up in the best way for you!
Assuming a director has only one source of income from the company, the most efficient plan would be :
Directors salary set a tax efficient level (see below) - a salary is a tax deductible expense, which means you reduce the companies taxable profits. If you have family who assist you, such as a partner, you can also pay them a salary which will also increase the company savings. Due to the new changes from April, having a second person on the payroll also allows for an allowance which maximises tax savings further - see further below.
Expenses - It is important to ensure all expenses paid for on behalf of the company are repaid. Expenses reduce the company profits, and there is no tax payable on expenses reimbursed to a director.
Contribute towards a Personal Pension (SIPP) - If you contribute towards a pension directly from the company, this acts as a business expense and reduces the company profits. This is a great way to add to your overall directors remuneration package, whilst reducing the company taxes.
Careful dividend extraction - It is important to ensure you understand what is a suitable level of dividend to extract based on your desired level of income, and personal tax payable each period. It is advisable to plan this in advance and discuss with your accountant a strategy of what to take each month to ensure you have no nasty tax surprises at year end!
Dividends also come with the added incentive of a lower tax rate and no national insurance contributions!
State pension contributions - By paying a salary at or above the NIC threshold, you build up your contributions toward your state pension.
Tax rates and allowances for the 2025/26 tax year
Below is the position for taxpayers in England, Northern Ireland and Wales for the new tax year starting on 6th April 2025:
The tax-free personal allowance is unchanged at £12,570 and will remain static until 5 April 2028.
The tax-free dividend allowance remains at £500. Therefore any dividends paid in excess of this figure are potentially taxable
The basic rate limit remains frozen at £50,270.
There is no further reduction in the additional rate threshold which remains at £125,140.
We have not included the 2025/26 income tax rates for Scottish taxpayers in this article
What is the employers allowance?
In 2024/25 eligible employers can use the Employment Allowance to claim up to £5,000 in order to cover the costs of employer’s National Insurance. In 2025/26 the allowance increases to £10,500.
To be eligible, employers must have at least 1 employee or 2 directors on the payroll, and the directors must not have another company claiming the Employment Allowance already. This means sole directors can’t claim the allowance, which is why the optimum salary is a bit different for them.
What options are available?
Its important to note that below are the most obvious options, however there are many variables and a different salary level may be best for you :
Directors salary - option 1 : Sole Director/employee
If you’re the sole employee in your business, you won’t qualify for the National Insurance Employment Allowance. In this case, you may decide to keep the salary at the Employers NI limit:
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.
Personal tax (assuming no other income) = £3,255
Company tax savings based on 19 % = £950
Directors salary - option 2 : Sole Director/employee
If you’re the sole employee in your business, you won’t qualify for the National Insurance Employment Allowance. However, due to the increased company tax savings, you may decide to keep the salary at the personal allowance :
Salary: Set your salary at £12,570 per year (or £1,047.50 per month).
Dividends: Draw up to £37,700 while staying within the basic tax rate band.
Personal tax (assuming no other income) = £3,255
Company tax savings based on 19% = £2,604.05
Directors salary - option 3 : More than 1 director or employee
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 with no additional employers NI expense. The advised salary would then be :
Salary: Set your salary at £12,570 per year (or £1,047.50 per month).
Dividends: Draw up to £37,700 while staying within the basic tax rate band.
Personal tax (assuming no other income) = £3,255
Company tax savings based on 19% = £2,388.30 (increasing to £4,776.60 if two directors)
Summary
Overall it really does depend on your circumstances more than ever, as to what will work for you and your business. It is important to keep in mind a salary will reduce your profits, therefore it could be better to have a higher directors salary to bring your company profits and tax rates down, however if your company profits are lower then bearing additional employers NI costs will not be efficient.
Where you are able to claim the NI Employment Allowance there is a significant tax saving overall. As a result, single director companies will be worse off because of the changes in the Autumn Budget.
Therefore, if you’re the only one working for your company, there’s a tax advantage in employing a family member before the start of the new tax year.
If you would like support on anything raised or to see how HPC Accountancy could support you and save you tax, get in touch today!
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