If you are a limited company owner and also a Director you might be asking yourself what is the most tax efficient salary for this new tax year?
The simple answer to that question is that it hasn’t really changed from last year and that you should be paying yourself £12,570.
There are some changes though and it is good to understand the impact of those changes on your pocket.
So, let’s take a look at how this number is calculated and what impact it has on your tax.
However, before we get into the nitty gritty of this we warn you that there will be some maths involved in this article – however there won’t be a test.
Jargon alert, we have to define some terms and look at some of the rates that have changed and the way they impact the amount that will need to be paid to HMRC:
|
Term |
Meaning |
Rate |
Lower limit |
Upper Limit |
|---|---|---|---|---|
|
National Insurance Primary Threshold |
This when National Insurance starts to be paid by the employee |
8% |
£12,570 |
£50,270 |
|
Employees National Insurance Upper Secondary Threshold |
This National Insurance is paid by the employee |
2% |
£50,270 |
|
|
National Insurance Secondary Threshold |
This when National Insurance starts to be paid by the employer |
15.50% |
£5,000 |
|
Employees NI is deducted from the Gross Salary as part of the ‘Take Home’ calculation. Income Tax and any Pension contributions (under a Relief at Source arrangement) are also deducted to arrive at the ‘Take Home’ figure. This means that the first £12,570 will not have any Employees National Insurance. Then with the next block of income between £12,570 and £50,270 National Insurance is charged at 8% on the employee. When the employee earns over £50,270 the amount of National Insurance over £50,270 is charged at 2% on the employee.
|
Term |
Meaning |
Rate/Amount |
|---|---|---|
|
Employment Allowance |
This is the amount of employers NI the government gives as an allowance |
10,500 |
This means that the first £10,500 of Employers NI is not due to be paid over to HMRC.
What are the rules to claim Employment Allowance?
To be able to claim Employment Allowance, there are two simple rules:
-
you’re a business or public body you do less than half your work in the public sector (such as for local councils and NHS services)
-
If your company has only one director, they must not be the only employee liable for secondary Class 1 National Insurance
https://www.gov.uk/claim-employment-allowance
So what has changed to Employers National Insurance?
Last payroll year 2024/2025, the Employment Allowance was £5,000 and this year 2025/2026 it is £10,500. On the face of it, the government has been very generous with its allowances.
However, last year the Secondary Threshold was £9,100 rather than £5,000. So the government has given and taken in one swoop.
The rate that Employers NI is paid at has also increased from 13.8% to 15.5%.
Any employee earning £12,570 or more will now incur Employers NI of £1,173.35 (£12,570-£5,000) x 15.5%), whereas last payroll year it was £478.86 (£12,570-£9,100) x 13.80%. An increase of £694.49 per employee.
The point where the additional Employment Allowance runs out is where you have just over 7 employees. 7.2 FTE earning £12,570 or more.
Below is a comparison of the salary levels achievable without incurring Employer’s NI by maximising the Employment Allowance:
|
No. of FTEs |
OLD (24/25) |
NEW (25/26) |
||
|---|---|---|---|---|
|
|
Total Salaries |
Average Salary |
Total Salaries |
Average Salary |
|
1 |
45332 |
45332 |
72742 |
72742 |
|
2 |
54432 |
27216 |
77742 |
38871 |
|
3 |
63532 |
21177 |
82742 |
27581 |
|
4 |
72632 |
18158 |
87742 |
21935 |
|
5 |
81732 |
16346 |
92742 |
18548 |
|
6 |
90832 |
15139 |
97742 |
16290 |
|
7 |
99932 |
14276 |
102742 |
14677 |
|
8 |
109032 |
13629 |
107742 |
13468 |
If I cannot claim the Employment Allowance, what should I pay myself?
If you make a profit then answer is still likely to be £12,570.
If you pay a salary as a director of £12,570 then you will pay the following:
Income Tax – £0 if using your Personal Allowance
Employees NI – £0 (£12,570 is the threshold)
Employers NI – £1,173.35
Corporation Tax saving would be at least 19% x £12,570 = £2,388.30. You’ll also save £222.94 of Corporation Tax on the Employers NI paid. Meaning overall, you will be £1,437.89 better off.
How about I pay myself only £5,000?
This on the face of it seems like a solid strategy. However there are a couple of things to bear in mind:
To get pension contribution years for a state pension, you will need a salary of £6,396 to gain a ‘qualifying year’
To make the take home up to £12,570 then you will need to top up the £5000 through dividends. So, £7,570 will need to be taken as dividends. Dividends are taken after tax, so with a Corporation Tax rate of 19% there will be Corporation tax paid on this amount of £1,775.68. So, even though Employers NI isn’t being paid, you will be worse off overall.
What about if I have another job and I earn less than £37,700?
The 20% income tax band allows for earnings up to £50,270 at an income tax rate of 20%. If you take £12,570 then you will pay:
Employers NI – £1,173.35
Income Tax – £2,514
Save Corporation Tax – £2,388.30
The total you would pay is £1,299.05 a marginal rate of £1,299.05/£12,570 = 10.3%
Compare that to Dividends:
Corporation Tax at 19% = £2,948.52
Dividend Tax at 8.75% = £1,099.88
A total tax payable of £4,048.40 a marginal rate of 32%
If you do not fall into any of these examples, why not get in touch and we can discuss a profit extraction strategy tailored to your specific circumstances.